Primary Mortgage Market Guide - SmartAsset

The primary mortgage market connects mortgage lenders with borrowers who want to buy or borrow against owner-occupied homes, vacation homes and investment properties. Most homeowners need a mortgage to buy their homes, so it’s important to understand the process and benefits of the primary mortgage market. Here’s what you need to know. If you need help with a mortgage or any other financial questions, consider working with a financial advisor.

Primary Mortgage Market Definition

The primary mortgage market is the collection of banks and lenders who lend to borrowers to buy or refinance their homes. Some banks sell their loans to other banks and investors through the secondary mortgage market. Others keep the mortgages on their balance sheet to collect the income from the borrower’s monthly mortgage payments.

Benefits of the Primary Mortgage Market

The primary mortgage market offers numerous benefits for homeowners and investors. Because the typical homeowner only buys and sells a home every seven years, they often take these benefits for granted.

Consistent Lending Requirements

The primary mortgage market has matured to the point where banks and lenders follow fairly consistent lending requirements. While many banks and lenders offer different programs, their lending requirements do not change based on who is borrowing the money. This consistency helps to eliminate bias from the mortgage market to ensure that borrowers of every race, gender, ethnicity and other factors are treated fairly.

Standard Process

When applying for a mortgage, the process is mostly standardized among lenders. This standard process helps borrowers understand what is expected of them and what they’ll encounter from application to closing.

Low Closing Costs

Banks and mortgage lenders often handle underwriting and processing in-house. Some larger banks centralize the process for even greater efficiencies. Lenders amortize their fixed staffing costs over a large number of loans, which results in lower closing costs for every borrower.

Small Down Payments

Banks and government programs offer a variety of down payment options for borrowers. A generation ago, the standard down payment was 20%. Today, with high competition and numerous assistance programs, many borrowers qualify for down payments as low as 3%.

For example, the FHA offers down payments as low as 3.5% for low-to-moderate-income borrowers that qualify for their mortgages. Keep in mind, however, that a down payment of less than 20% typically requires mortgage insurance, which adds to the monthly cost of buying a home.

Flexibility

When applying for a mortgage, there are many different types of mortgages available to suit your needs. While many borrowers opt for the standard 30-year fixed-rate mortgage, that’s not the only choice. Other options include 10-, 15- and 20-year terms, adjustable-rate mortgages (ARMs) and interest-only mortgages, to name a few.

Depending on your budget, credit score, down payment and other factors, there is a wide variety of mortgage options to choose from. Consult a mortgage broker or your local banker to discuss your situation and goals to find out what’s available.

Types of Lenders in the Primary Mortgage Market

Here are the main types of lenders in the primary mortgage market:

Mortgage bankers. A mortgage banker is an individual or representation of a company that lends its own money to borrowers.
Commercial banks. Financial institutions that offer a variety of banking and lending products in addition to mortgages. Some borrowers prefer borrowing from their current bank because of the convenience.
Credit unions. A credit union is a financial institution that operates as a not-for-profit company. They tend to offer lower rates and fees on their banking and lending products than competing banks.
Savings and loan associations. Savings and loan associations (S&Ls) are similar to traditional commercial banks. However, they focus on savings accounts and mortgages rather than a broader array of banking and loan products.
Mortgage brokers. A mortgage broker offers products from multiple banks and mortgage lenders to find the best fit for their customers. Many borrowers prefer working with a broker because they can shop multiple lenders through one application.

Primary Mortgage Market vs. Secondary Mortgage Market

When a mortgage loan is originated, that happens in the primary mortgage market. If the lender decides to sell the loan, they’ll do so on the secondary mortgage market. There are many reasons why a lender would sell its mortgages. Here are a few of the most common reasons:

Reduce their concentration of loans
Diversify their risk
Receive capital to originate more loans
Profit from the sale

The Bottom Line

While most borrowers have never heard of the term primary mortgage market, they benefit from it whenever they buy or refinance a home. The primary mortgage market has a standard process that creates consistent lending requirements for borrowers. There are many institutions that originate mortgages, which leads to lower costs and many choices when getting a loan.

Tips for Getting a Mortgage

If you’re looking to buy or refinance your home, it pays to understand what your new mortgage payment will be. Our mortgage calculator estimates your mortgage payment by factoring in the amount borrowed, the term of the loan, interest rate and other factors. Understanding your expected monthly payment will help you determine if this loan will fit into your budget.
When applying for a loan, some lenders may require proof of investments and other assets to approve your application. If you have a financial advisor this person can easily provide those documents for you to accelerate your loan process. But if you don’t, finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.