Methods and sources of financing: mortgage and seller financing, primary and secondary markets

Financing starts with a debt

Mortgage financing lets a buyer borrow against real property. The promissory note states the debt and repayment promise; the mortgage or deed of trust secures repayment with the property. The borrower is the mortgagor and the lender is the mortgagee when a mortgage is used. A fixed-rate loan keeps its interest rate; an adjustable-rate loan changes according to its terms. Fully amortizing payments retire the debt by maturity, while a balloon structure leaves a larger final payment.

Who supplies the money?

Banks, credit unions, savings institutions, mortgage banking companies, and private lenders can originate real estate loans. A mortgage broker generally arranges financing with a lender; a mortgage banker originates loans and may sell them. A portfolio lender retains loans as investments. These are roles, not mutually exclusive business identities.

A conventional mortgage is not federally insured or guaranteed. FHA financing involves mortgage insurance, not a routine direct loan from the government to the buyer. The supplied federal statute authorizes mortgage insurance and premium charges under 12 U.S.C. § 1709. VA financing generally uses a federal guaranty for eligible borrowers. Conventional does not mean conforming: conforming loans meet applicable Fannie Mae or Freddie Mac purchase standards; a conventional loan can be nonconforming.

Seller financing

A seller can accept a buyer's note for part or all of the unpaid purchase price, often secured by a mortgage or deed of trust. This seller carryback may accompany an institutional first loan. With a contract for deed, the seller generally retains legal title until the buyer fulfills the contract. That differs from delivering a deed at closing and retaining a lien.

A wraparound obligation includes an existing debt; the buyer pays the wrap lender, who remains responsible for payments on the underlying loan. In an assumption, a buyer undertakes personal liability for an existing debt; buying subject to that debt does not itself create that personal obligation. Seller financing and existing-loan transfers require review of applicable lending law, contract terms, lender consent, and any due-on-sale clause; they are not shortcuts around those requirements.

Two markets, different transactions

The primary mortgage market is where borrowers obtain new loans. In the secondary mortgage market, existing loans and mortgage-backed securities are bought and sold. Selling loans can replenish an originator's funds for new lending. Fannie Mae and Freddie Mac purchase eligible mortgages and support securitization. Ginnie Mae guarantees payments on eligible mortgage-backed securities; it does not originate buyers' home loans.

Picture a buyer borrowing from a lender, then that lender selling the existing loan to an investor. The original closing is primary-market activity; the later loan sale is secondary-market activity. Servicing means collecting payments and administering the account. Ownership and servicing can be separated: a loan sale need not change the servicer or rewrite the note's repayment terms.