Understanding the lending markets is important when looking at purchasing one home or two or many! So, what are the lending markets and why are they important to real estate investing?
RETAIL LENDING MARKET
This is where the lending market, mortgage bankers, mortgage brokers, and banks intersects with the retail borrower and any home buyer as well as multi property (1-4 units) investor. You and I primarily reside in this lending market. The lenders that make these loans pool them together and sell them to the secondary lending market. These loans must meet certain underwriting guidelines in order to be sold to the secondary market.
SECONDARY LENDING MARKET
This is where the quasi-government mortgage banks of Fannie Mae and Freddie Mac and a number of large private sector mortgage banks purchase these loans typically in pools of a million dollars and up. They then repackage them in larger pools and sell them to investors in the Equities Lending market.
EQUITIES LENDING MARKET
This is where pension funds, insurance companies, mutual funds, foreign investors, and state governments purchase these loans after they have been repackaged as mortgage securities. The key to understand is that this is what keeps the mortgage lending industry liquid. In my opinion, the lending market is going to be very liquid for real estate for the foreseeable future!
So, what does that mean for you? This is the golden age for the investor. It is this system that makes the Real Estate market more liquid than any time in history because there appears to be an unlimited supply of money for buying Real Estate. And, the underwriting system for most loans is now computerized which makes getting approved for a loan much easier and must faster.
Another part of understanding the lending market is to know the difference between a mortgage broker and a mortgage lender. Knowing the difference between the two and doing some due diligence will help you get the best lending product for your investment.
A mortgage banker usually sells his own products. He is usually affiliated with a bank or lending institution. The pros are that he can close faster and sometimes give the customer a lower interest rate or lower cost. The cons are he sometimes cannot get a loan done because his products are so limited.
A mortgage broker represents many lenders. An experienced knowledgeable Mortgage Broker can meet or sometimes beat the offer of a Mortgage banker as well as get the loan funded because he has so many lenders available.
So, if you do not have a mortgage banker or broker that you have used in the past and feel comfortable using again, I would suggest you shop around and do some due diligence. “Diligence is the mother of good fortune” (Benjamin Disraeli, Former British Prime Minister).
The real estate business is more about finance rather than about real estate. It is important to understand and use the lending industry to help you finance your real estate investment.
To find out more about the lending industry and real estate, attend the Denver Real Estate Workshop in September.