The VA establishes lending guidelines that VA lenders must follow. If the lender doesn’t follow the required guidelines, the loan won’t be eligible for sale in the secondary market which means the lender will keep the loan in its portfolio until the loan is refinanced or otherwise retired. Lenders don’t like to hold onto VA loans or any other loan for that matter—the want to be able to sell the VA loan. Why is that?
The Government National Mortgage Association, or GNMA is a government entity set up to buy government-guaranteed loans including VA mortgages. As long as the loan meets the required VA rules, the loan is eligible for sale either to other lenders or directly to GNMA, commonly referred to as Ginnie Mae. There are specific guidelines that must be met and there are guidelines that allow the lender a bit of flexibility when interpreting a rule.
Why is it important to VA lenders that a loan is eligible to be sold? Ginnie Mae was established in large part to provide liquidity it the mortgage business. Liquidity in this instance means cash or a credit line. Look at it this way. Say a mortgage company has a credit line of $1 million dollars and is on a mission to place VA loans in the community. The VA lender makes four loans each totaling $250,000. The VA lender has reached its goal, right? Yes, but now the lender’s credit line is all used up and the VA lender is forced to find more cash, request an increase in their credit line or wait until one of the $250,000 loans goes away when someone refinances the loan into another one or the home is sold.
That’s when selling a loan is important. By selling the loan, the credit line is restored and the VA lender is back in the lending business.