A man once said:ย The real estate business is notย about real estate – it is aboutย finance. He was right.ย One of the biggest hangups for peopleย in real estate investing is not knowing how to finance their real estate and not knowing how loans work. I want to help you understand how aย loan application flows to avoid this hang-up.
A lot ofย people don’t know this, but in the early 1990’s the mortgage industry and the ability of the investor (or average consumer) to get loans dramatically changed. The mortgage industry went to computerized lending. And they elevated the importance of the FICO credit score, which had just come out. That made the real estate market much more liquid than it had been in the previous 100 years. Since then, three phases have developed inย the loan process.
Retailing Lending Market: Thisย is where the lending market, mortgageย bankers, mortgage brokers, and banksย intersects with the retail borrowerโi.e.ย home buyer or multi propertyย (1-4 units) investor. The way this works is that we go to one of these three places to apply for a loan. The lenders underwrite the loan where we make applications according to certain criteria. The lenders thatย make these loans pool them togetherย and sell them to the secondary lendingย market. These loans must meet certainย underwriting guidelines in order to beย sold to the secondary market.
Occasionally you’ll find a lender that will hold loans within their portfolio, called portfolio lending. Local banks will do this with you if you set up a good relationship with them so that theyย don’t have to be concerned with the criteria.
Secondary Lending Market:ย This is where the quasi-governmentย mortgage banks of Fannie Mae andย Freddie Mac and a number of largeย private sector mortgage banksย purchase these loansโtypically inย pools of a million dollars and up.ย They then repackage them in largerย pools and sell them to investors in the equities market. So the retail lending market is where you and I interface primarily with getting our loans done. Thenย the secondary lending market is buying themย and repackaging them.
Equities Lending Market:ย This is where pension funds,ย insurance companies, mutualย funds, foreign investors, and stateย governments come in. They purchase these pools or packages of loans andย they package themย as mortgageย securities, just like you would stock or similar things. That’s why we call itย the equities lending market.
This is what keeps theย mortgage lending industry liquid. For the foreseeable future, even out 50 years from now (in my opinion) the lending market is going to be very liquid for real estate. Since the early 1990’s, the underwritingย system for most loans is nowย computerized which makes gettingย approved for a loan much easier.
Let me know the questions you might have about Lending in the comment section!
With the new blog schedule, join me every Thursday for Real Estate tips.ย
