All mortgage loans come with their own set of rules, guidelines and quirks. Mortgage lenders approve loan applications using these universal guidelines and once a loan is approved the loan can be sold in what is called the "secondary" market and VA loans are no different. This secondary market is an important cog in the world of VA lending and helps free up cash for VA lenders to make even more VA loans. How does this work?
Why do lenders sell loans, anyway? Why don't they just keep them? Those are good questions and the basic answer refers to cash flow. Let's look at an analogy together.
Say you're the rich uncle and have $100,000 in the bank and it's well known in the family that you're happy to lend it out to relatives when they need it, as long as they pay you back. One day, your nephew calls and says he needs to borrow $50,000 to start a business. He provides you with his business plan and you agree to issue the loan. He's going to pay you back with interest over the next 60 months.
You get another call a week later from your brother-in-law who wants to borrow some $50,000 and will pay you back at a rate of 8.00 percent over four years. You can't find a solid 8.00 percent return in any market and your brother-in-law has always paid you back on time so you loan him the money.
The next week your sister calls and wants to borrow $10,000 to help with medical bills. You'd love to but guess what? Your vault's empty. You had $100,000 in the bank, loaned it out and yes, you're going to collect some interest payments but you have no more money to lend.
VA lenders follow a similar philosophy. VA lenders can issue a VA loan then decide whether or not to keep it for the interest payments or sell it to another VA lender. Once a loan is sold, the original VA lender replenishes its coffers and proceeds to issue another VA loan.
Making a Commodity
When lenders buy and sell VA loans in the secondary market, they know beforehand what they're buying. A mortgage loan under a specific loan amount that conforms to VA lending guidelines. A VA loan in this fashion is essentially a commodity; one VA loan is like the next VA loan in terms of credit, income and loan amount requirements.
Because these loans are all underwritten to the very same set of standards, lenders know in advance what they're buying without having to individually evaluate each VA loan to be sold. Lenders do audit their purchased loans but underwriting a VA loan with universal VA guidelines streamlines the buying and selling process.
Your Loan is Sold
Are you surprised? You really shouldn't be. When you signed your original loan documents, one of the pieces of paper you signed was an acknowledgement that the lender is or is not engaged in selling VA home loans and if they do sell, the approximate percentage of their pipeline is ultimately sold.
Yet what happens if your loan is sold? The first notification that your loan will be sold is with a "goodbye" letter, a letter from your current lender telling you that your loan is sold and identifies the new lender. You will then receive a similar "hello" letter from your new lender, providing you with their contact information, your account number and general customer service information.
However, not one thing changes in terms of your loan. Your rate doesn't change, your due dates don't change nor your monthly payments or any other facet of your original loan. Even if your loan is sold 10 times, nothing can change the terms of the original note. In effect, if your loan is sold, nothing really happens. You simply make your check to a new lender.
This morning, my kids asked me about how I became interested in money. There are a couple of reasons, but we got talking about my job in mortgage banking and how I worked with delinquent borrowers and that I got to review the original underwriting on those mortgages, and that I saw a lot of […]