Why Do Mortgage Companies Sell Closed Loans?
When you get a mortgage from a bank or mortgage broker, chances are your loan will be sold after it is closed. Who will your loan be sold to, why and how will it affect you? Let’s take a closer look.
Why are loans sold?
In a nutshell, mortgage lenders sell loans to make more money available to lend to other borrowers. If lenders couldn’t sell loans, they would simply run out of money to lend! In days past, that’s exactly what happened. Then, banks could only lend the money they had on hand from their customers who made deposits. For example, if the total of a bank’s checking and savings accounts was $50 million, that’s all it could lend to homebuyers.
Who buys the loans?
To have enough money to lend, the “secondary mortgage market” was created. The “secondary market” is the general term used for the buying and selling of residential mortgages—and you may be familiar with some of its key participants. For example, you may have heard of Fannie Mae and Freddie Mac. These are secondary-market organizations that buy loans from mortgage lenders, as long as certain conditions are met.
When your mortgage is sold to Fannie or Freddie, your lender receives new funds to lend to the next borrower. In this way, your lender can serve more homebuyers than it could otherwise.
In fact, Fannie and Freddie are the biggest buyers of mortgages in America. But keep in mind that they don’t actually lend money to borrowers. That’s the job of your mortgage lender. Fannie and Freddie simply buy qualifying loans after they’re closed, to help make sure mortgage companies have enough money to lend. To ensure that loans qualify to be purchased, your lender will follow guidelines established by either Fannie or Freddie (depending on which one is going to buy the loan).
What exactly is sold?
That depends on your mortgage lender. Your mortgage has two parts that can be sold:
1. The interest you pay.
2. The “servicing” of the loan, which includes collecting the monthly payments, managing the escrow account (which covers your property taxes and homeowner’s insurance) and customer service.
Some lenders will sell both parts of a mortgage. Other lenders prefer to keep the mortgages that they make and sell only the servicing of the loans. In this scenario, the lender will earn the interest that you pay each month.
If your loan is sold, how will it affect you?
In short, it won’t. If your mortgage is sold, the terms (such as how the interest rate is calculated and your repayment period) cannot be changed. You’re protected by law. Also, having your mortgage sold will not affect your credit rating.