Getting a home loan from a mortgage lender means you’re interacting in what’s known as the primary mortgage market. But many lenders turn around and sell some or all of their loans and the right to service them to investors in what’s known as the secondary mortgage market.
This is a marketplace where investors purchase mortgages, group them together and package them into mortgage-backed securities. These securities are then sold to other investors.
Selling mortgages on the secondary market gives lenders much-needed cash, which they can turn around and use to fund more home loans.
The secondary market is one reason why underwriting requirements can vary among lenders. Those investors, loan purchasers and others in the secondary market can have their own guidelines and requirements for loans they will purchase or back.
In order to safely sell their loans, lenders may require borrowers to meet not just VA requirements but those set by investors, and these requirements can include things like minimum credit score, allowable debt-to-income ratio and more. These additional guidelines are known as overlays.
The government-sponsored enterprises Fannie Mae and Freddie Mac are the country’s two biggest investors on the secondary market. These are quasi-governmental entities, and they purchase only conventional loans.
For government-backed mortgages like VA loans, things look a little different. For VA loans, many lenders interact with the governmental agency known as Ginnie Mae.
Unlike Fannie and Freddie, Ginnie Mae doesn’t purchase mortgages from lenders. Instead, it essentially insures groups of loans that are made and sold by lenders.
Ginnie Mae is a part of the U.S. Department of Housing and Urban Development, which means the federal government fully guarantees those groups of loans, which are known as mortgage-backed securities.
Having the “full faith and credit” of the federal government gives investors greater confidence in Ginnie Mae securities, and that ultimately helps explain why VA loans and FHA loans typically have lower average interest rates than conventional mortgages, which don’t carry that government backing.
Ginnie Mae carefully vets lenders and servicers before allowing them to participate in the program. The agency continues to review participating lenders on a regular basis, looking at key things like their financial security and their performance making and servicing loans. Veterans United is proud to be an approved issuers of Ginnie Mae mortgage-backed securities.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae doesn’t have guidelines or requirements that affect a borrower’s ability to qualify for a VA loan. Prospective borrowers will need to meet VA and lender guidelines.