Consumers may have heard the term “secondary market” as it relates to housing but it’s not very likely. Lenders, however, are very familiar with the term as the secondary market is the lifeblood of the industry. Without it, home loan lending would slow to a crawl resulting in fewer people being able to afford a home along with higher rates to boot.
When a mortgage company approves a loan application with the intention of selling the loan in the secondary market, it does so by following guidelines issued by either Fannie Mae or Freddie Mac. These industry giants issue specific lending guidelines that if followed, a lender can sell that loan to other Fannie or Freddie approved lenders or directly to Fannie or Freddie.
Gone are the days when a bank would issue a home loan to someone by pulling money directly out of its vault. That process limits how much a bank can ultimately lend. For example, a bank might have $1 million dollars and announces it’s ready to issue some home loans. 10 people line up and all 10 ask for a $100,000 loan to buy a home. They’re all approved and they proceed with their purchase. But now the bank is out of money. Yes, the bank will get paid back over time but essentially it’s no longer a home loan lender because it ran out of funds. The secondary market takes care of that conundrum.
When a mortgage company approves a loan using these standards, it funds the new mortgage by tapping into a line of credit. Once the loan is approved and funded it then sells the loan to a third party, most often either Fannie Mae or Freddie Mac. Once sold, the credit line is replenished and the mortgage company can continue making more home loans. The secondary market exists to provide liquidity in the mortgage industry.
One important guideline lenders must follow is to meet the conforming loan limits. These new limits were recently announced last November. The new conforming loan limit for 2019 will be $484,350 for a single family home. This represents an increase from the 2018 limit of $453,100, or 6.9 percent from the previous year’s value.
See the complete list of 2019 loan limits here.
These new limits are announced by the Federal Housing Finance Agency who, among other things, monitor the annual Housing Price Index. If the HPI shows an increase in the national average home value, the new conforming loan limits will be adjusted in a similar fashion. Because the HPI increased by 6.9 percent from 2017 to 2018, the new limit will then be $484,350.
In areas where home values are generally much higher compared to most parts of the country, there are some adjustments to the conforming loan limits to accommodate these higher values. These so-called “high cost” areas can have conforming loan limits for a single-family home as high as $726,525. These new limits will go into effect on January 1, 2019.
Buyers can read more about Conventional Loans here, please connect with us today to learn more.