A Guide To Understanding The Primary Mortgage Market

What is the primary mortgage market and how does it differ from the secondary mortgage market? When it comes to the primary versus secondary mortgage market, it certainly helps to know how both work, what audiences they serve and how they stack up against one another.

Here’s what you need to know about the primary market – and where you can expect to encounter it on your home buying journey.

What Is The Primary Mortgage Market?

The primary mortgage market is where home buyers connect with mortgage lenders to finance and purchase a new home or investment property. The primary mortgage market is where home loans originate. The secondary mortgage market is where home loans are sold to investors.

If you’re looking into buying housing, you’ll be working with the primary mortgage market anytime that you’re seeking to obtain financing for homeownership. This relationship starts the moment you reach out to a lender to obtain a preapproval letter. You’ll continue to work with players in the primary mortgage market as you proceed with a real estate transaction, most prominently with home lenders, until you close on your new property.

How Does The Primary Mortgage Market Work?

Your interactions with the primary mortgage market begin when you initiate the home buying process by directly contacting a lender about taking out a mortgage. You’ll continue to work with and encounter parties who operate within the primary mortgage market as you move through the home buying process up to and including closing on your new residence or investment property. In effect, if they’re involved in the financial side of a real estate transaction, odds are the party has a role to play and operates within the primary mortgage market.

Primary Mortgage Lender Types

Below are the most common types of mortgage lenders to choose from in the primary mortgage market:

Once you close on your mortgage loan with one of the institutions above, these organizations often turn around and sell your mortgages to a government-sponsored enterprise (GSE), Fannie Mae or Freddie Mac. The GSEs package multiple mortgages together into mortgage-backed securities which are sold as investments on the secondary market.

Primary Vs. Secondary Mortgage Market

The primary mortgage market is the one that most people are familiar with, whether you have purchased a home before or not. This is where you search for a home, find a lender offering the best loan terms and sign a mortgage to finance the purchase of your dream home. The secondary mortgage market is much less familiar to the general public. Once you close on your home, the lender can then sell your mortgage to another financial institution, such as one of the GSEs mentioned above.

The secondary markets provide liquidity to lenders in the primary market. If mortgage originators could not sell their mortgages on the secondary market, they would have far less money to loan to home buyers. The secondary market frees mortgage originators to provide more money to borrowers at a better price while also creating an investment vehicle for the secondary market.

Why The Primary Mortgage Market Matters

The primary mortgage market provides several essential benefits for buyers.

Small Down Payments

While a 20% down payment is considered the historical standard for home purchases, lenders in the primary market will allow buyers to put down far less money depending on their financial situation. Many lenders offer conventional mortgage loans with a minimum 3% down payment, and the Federal Housing Administration (FHA) requires minimum down payments as low as 3.5%. Buyers should keep in mind that if they put less than 20% down on a conventional loan, lenders will require them to purchase private mortgage insurance (PMI), a monthly fee that offers protection to lenders in case the buyer defaults on the loan.

Low Closing Costs

Since most mortgage originators conduct the underwriting process in-house, these lenders can offer lower closing costs. Underwriting involves extensive research and paperwork covering a borrower's financial history to determine whether to qualify them for a loan. Completing this process in-house is a great way for mortgage originators to save borrowers money.

Flexible

The primary mortgage market offers a wide array of loan types, interest rates and loan terms that gives borrowers the flexibility to craft terms that fit their financial needs. This flexibility begins with individualized attention that each borrower receives on the primary market. As you proceed through the real estate buying process, lenders will work with you to make sure that all of your documentation is in order, you meet all your deadlines and account for every detail.

With the help of an attentive lender, you can choose from multiple types of mortgage loans. From conventional and conforming mortgages, including 15- and 30-year fixed mortgage rate options and adjustable-rate mortgages (ARMs), to jumbo and government-backed loans, a variety of choices are designed to suit every need. Because the primary market is so broad and serviced by so many entities competing for your business, it creates an opportunity as a buyer to shop around and secure competitive rates and loan terms.

Primary Mortgage Market FAQs

Below are some of the most common questions about the primary mortgage market.

What is an example of the primary mortgage market?

If you purchase a home by using a mortgage financed by a lender, you are participating in the primary mortgage market. It is the market you are most likely to be aware of, as it is the traditional market to purchase a home.

What mortgages are part of the primary mortgage market?

Several different types of mortgage loans can be on the primary mortgage market, including conventional loans, conforming loans, fixed-rate loans or adjustable-rate loans. If any of these loans originated from this transaction, they are considered part of the primary mortgage market.

Who isn’t an originator of primary loans?

Fannie Mae and Freddie Mac do not originate mortgage loans in the primary market. These Government-sponsored entities instead buy loans from lenders in the secondary market.

What are the risks of the primary mortgage market?

Buyers and lenders take on several risks when buying a home on the primary market. If a buyer cannot make their mortgage payments, they could harm their credit score and even lose their home. Mortgage investors also run the risk of losing their investment if a borrower defaults on their loan.

The Bottom Line

The primary mortgage market serves home buyers by facilitating their access to capital while the secondary market facilitates access to capital for mortgage lenders. Buyers benefit from the primary mortgage market by taking advantage of multiple loan types  and terms that the market provides. If you’re ready to join the primary mortgage market, start the mortgage application process today!