Often times borrowers wonder about the basics of the “secondary” mortgage market. But what are they, and why do lenders “sell” them loans? Mortgages, and specifically liens, are substantial sums of money that are tied up for up to 30 years.
While depository institutions, which are chartered by both the Federal and State governments, have the capacity to lend large amounts of capital over long periods of time, mortgage banks don’t. Keep in mind that a bank, in theory, can take the money it has in deposits, pool the money together, and lend it out to make home loans.
In order to maintain a sufficient pool of money such that they can continue making loans, mortgage banks, which do not take deposits companies but offer greater program and rate flexibility, “sell off” borrower’s mortgages to another institution—often Fannie or Freddie, but also to pension funds, insurance companies, or securities dealers. Along with allowing mortgage banks to do more business, this practice earns mortgage bankers a commission on every loan they sell.
A mortgage has one of two paths it can follow once it enters the secondary market. It can be sold by a lender into one of Freddie, Fannie, or another financial institution’s investment portfolios for cash, or it can be pooled with other mortgages in exchange for Mortgage-Backed Securities (MBS). MBS are very liquid investments that are traded on Wall Street through securities dealers, which means that lenders can easily hold or sell them. In turn, these transactions provide capital that can be loaned out to other borrowers.
For someone thinking about becoming a landlord and either buying a non-owner property or converting their own house into a rental, there are five tips and things to think about before doing so.
The first is to know and follow the rules since landlords must adhere to federal, local and state housing laws and health and safety codes.
The second thing to remember is that unless you hire a property manager, you’re on call 24/7. Emergencies can occur any time of the day and you, as the owner, are ultimately responsible for remedying the problem and providing a livable unit for your tenant.
The third thing to keep in mind is that interviewing potential tenants can be difficult; options include social media to advertise the space, or receiving referrals from friends and family. You may also want to consider using a property manager or property management company. The fourth thing is to assess your ability to fix things when they break. If the unit is not near you, or you are not “handy”, you’re in better shape than having to hire someone as those costs add up.
Lastly, prepare for the unexpected as there are things that will come up that you won’t be able to repair, so having a list of vendors that you can contact when something goes array (cockroaches, A/C breaks), will be beneficial. But once the decision is made to own a rental unit, loan originators have various programs that are similar to owner-occupied programs for financing. And there are some very attractive terms!
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