What Is the Primary Mortgage Market?

The Retail Mortgage Market Explained

Couple talking to a loan officer
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The primary mortgage market is where homebuyers go to get loans from retail mortgage lenders. This is different from the secondary mortgage market, which involves the buying and selling of mortgages after they have been originated.

Most homebuyers will work inside the primary mortgage market when they are purchasing mortgages or refinancing existing ones. Here’s how it impacts your homebuying experience.

Definition and Examples of the Primary Mortgage Market

The primary mortgage market is where homebuyers shop for and purchase home loans. You can get a mortgage from many different types of lenders including banks, credit unions, mortgage brokers, and other participants.  The retail mortgage market is usually very competitive and many participants, especially non-bank lenders, quickly sell the loans they originate to the secondary market—aggregators like Fannie Mae and Freddie Mac.

  • Alternate name: Retail mortgage market  

The secondary mortgage market is where investors buy and sell mortgages that have been originated by primary lenders. These loans are bundled by aggregators, often the government-sponsored entities Fannie Mae and Freddie Mac, into investment products called “Mortgage-Backed Securities” or MBS. Because these securities are backed by the government, they are considered safe and compete in the investment market with similarly safe investments like 10-year Treasury bonds.

Most homebuyers need a loan to buy a home (although some can pay in cash). When you’re searching for a loan to buy a home, you might compare offers from many different players, such as online lenders, your local bank or credit union, or mortgage brokers who represent wholesale lenders. You’ll compare lenders to see which one offers the best interest rate, the most advantageous repayment terms, and the lowest fees.

Next, you’ll complete an application.

After approval and closing, you’ll start making payments on your new home loan until it’s paid in full.

How the Primary Mortgage Market Works

Most homebuyers probably aren’t aware they’re participating in a “primary” market linked to a “secondary” one. But without the secondary market, the primary market would look much different. Secondary market participants buy and sell loans that already exist as investments. Through this interaction the primary mortgage market has access to the funds required to make and market loans. This liquidity helps keep the primary market well-supplied and mortgages more affordable.

You might have already experienced another way the primary and secondary markets interact. If you’re currently repaying a home loan, you might have gotten a letter explaining that you have a new mortgage lender or servicer. Even though another entity has purchased your loan, your payments, interest rate, due date, and other loan details haven't changed. You bought your loan in the primary mortgage market, and subsequently the originator of that loan sold it through the secondary mortgage market.

Primary Mortgage Market Roles and Functions

Lenders originating mortgage loans are responsible for several tasks before they can fund a loan, including:

  • Marketing: Finding potential borrowers
  • Research: Collecting information about the borrower, the property, and the loan
  • Underwriting: Evaluating the risk of the loan and ultimately approving or denying it
  • Compliance: Ensuring all the required documents are in place, including borrower loan documents and legal documents like deeds, notes, and disclosures in accordance with regulations and requirements of secondary market buyers
  • Closing: Delivering the funds, relevant documents, and collecting fees  

While primary mortgage market lenders have to keep a keen eye on the secondary market, for homebuyers it is the primary market that matters more. When you want to take out a new home loan, you’ll work in the primary mortgage market with lenders who originate loans. Even if or when your loan is sold through the secondary mortgage market, you shouldn’t experience any changes.

What Does the Primary Mortgage Market Cover? 

The primary mortgage market originates and markets home loans for all kinds of buyers. These include all the familiar types of mortgages, including:

Do I Need the Primary Mortgage Market?

For most of us, the primary mortgage market is the only place to go to get a home loan or to have one refinanced.

If you buy a home with cash, you won’t need a home loan and you’ll avoid the primary (and secondary) mortgage markets. But for those who buy homes with loans, you’ll go through the primary market. If your loan is sold to another entity in the secondary mortgage market, your loan terms you originally negotiated—such as for a 30-year, fixed-rate loan, for example—won’t change unless you refinance it.

Key Takeaways

  • The primary mortgage market provides loans that are offered by banks, credit unions, online lenders, and other institutions that originate home loans.
  • The primary mortgage market is distinct from the secondary mortgage market, which is where the lender who originated your loan sells your loan to another institution or investor.
  • Think of the primary mortgage market as the retail market for home loans where shoppers compare loan rates and terms. The secondary market is like a wholesale market that supplies the retail market.