You’ve undoubtedly heard of Fannie Mae, also known as the Federal National Mortgage Association, whether you’re in the market to purchase a home, refinance a property, or just follow the news (FNMA). Even if you’re unfamiliar with how Fannie Mae operates, you’re probably aware that it plays a large role in the housing market.
Fannie Mae is only one company to consider while looking for a mortgage. Still, knowing how investors like Fannie Mae operate can give you a better grasp of the housing industry and the broader mortgage process.
The Federal Home Loan Mortgage Corporation, or FHLMC, is often known as Freddie Mac. Freddie Mac was established in 1970 as part of the Emergency Home Finance Act to enhance the United States’ secondary mortgage market.
Prior to the establishment of Freddie Mac, the only entity that purchased real estate mortgages and house loans from issuers was the Federal National Mortgage Association (commonly known as Fannie Mae).
The Government National Mortgage Association (GNMA), sometimes known as Ginnie Mae, is a government entity that guarantees timely payments on mortgage-backed securities (MBS). Ginnie Mae collaborates with other government organizations to make affordable housing more widely available via mortgage loans.
The U.S. Department of Housing and Urban Development (HUD) oversees GNMA, which was formed as a consequence of a split from Fannie Mae. Its function is to provide market liquidity for home loans that are directly insured by the US government.
History Of Fannie Mae
The Federal National Mortgage Association (Fannie Mae) was established in 1938 as a Government Sponsored Enterprise (GSE) with the goal of making housing more accessible to low-income Americans. In the past, a sizable down payment of at least 50% was often needed to get a mortgage. There were additional stringent conditions that allowed the lender to repossess the house with only one late payment.
Fannie Mae has grown substantially since its inception, but it has also had some challenges along the way. After a shareholder investment round authorized by Congress, Fannie Mae became a private company in 1968. All of the money for it came from the sale of stocks and bonds. However, the economic crisis and ensuing real estate market difficulties in the late 2000s had a significant impact on Fannie Mae.
In late 2008, the government appointed the Federal Housing Finance Agency (FHFA) to serve as conservator for Fannie Mae. After being traded on the New York and Chicago stock markets, it was delisted in the middle of 2010. In return for preferred shares, the FHFA agrees to provide financial backing to Fannie Mae under specific conditions as outlined in the agreement.
How Do Fannie Mae (FNMA) Loans Work?
You cannot get a mortgage directly from Fannie Mae since it does not create loans. Banks and non-bank lenders are in charge of collecting a client’s application, underwriting the loan – which includes confirming income, assets, and property worth – and bringing them to the closing table. Fannie Mae purchases loans that match its standards from lenders once the deal closes.
Fannie Mae Conforming Loan Limits
The FHFA establishes conforming lending limitations for Fannie Mae. Fannie Mae guarantees these mortgage loans, known as conforming mortgages. This implies they will repay investors if the borrower defaults. Fannie Mae packages these loans into mortgage-backed securities (MBS) before selling them to investors on the open bond market.
An MBS might be made up of 1,000 or more loans with comparable features. Fannie Mae has various criteria, one of which is that they will not acquire nonconforming loans. Many factors might cause a loan to be nonconforming, but one of the most prevalent is jumbo loan status, which for 2022 is any loan above $726,200 for 1-unit houses in non-high-cost locations.
Fannie Mae Loan Requirements
You should always feel free to discuss your circumstances with a Home Loan Expert, however the following are some basic principles for Fannie Mae loan approval:
Your credit score is considered throughout the loan approval process. A qualifying FICO® Score of at least 620 is required for loans from Fannie Mae or its rival Freddie Mac. Individual borrowers’ qualifying scores are the median of the three main credit bureaus – Experian™, Equifax®, and TransUnion®. One feature of Fannie Mae loans is that if there are two or more borrowers on the loan, the average of the median credit scores becomes your qualifying credit score for mortgage purposes.
Debt-To-Income Ratio (DTI)
To qualify for a Fannie Mae loan, your DTI should be no more than 50%, which compares your monthly debt payments to your before-tax monthly income. This may need to be reduced based on your circumstances.
The down payment requirements for second houses and investment properties are greater, however for a 1-unit primary residence, the down payment might range from 3% to 5%.
Reserves are the amount of mortgage payments that lenders prefer to see in your account in the event of a loss of income or other financial difficulties. With a Fannie Mae loan, your reserves might be up to 6 months, however 2 months is usually a decent starting point.
Fannie Mae Mortgage Programs
Fannie Mae is a mortgage investor, but they offer programs to assist everyone from first-time home purchasers to existing homeowners and even renters.
The HomeReady® program, which is available to both first-time and repeat home purchasers, enables you to buy a house, refinance to decrease your rate, and/or alter your loan term with as little as 3% down or in existing equity.
Because the loan is meant to assist customers with low-to-moderate incomes, people on it cannot earn more than 80% of the area median income combined. Fannie Mae does provide a 3% down payment option with no income restrictions, but at least one customer must be a first-time home buyer.
Fannie Mae’s HomePath® website showcases foreclosures that it has taken control of for resale, often known as real estate owned (or REO) homes. When purchasing a foreclosed house, you must understand what you are getting into since they are often offered as-is and frequently need some maintenance. You may, however, be able to obtain a nice offer.
The RefiNow™ program provides solutions for homeowners who have previously struggled to qualify for a refinancing to decrease their mortgage payments. RefiNow™ offers less stringent DTI and home equity standards, making it suitable for homeowners with modest incomes.
Eligible homeowners for the RefiNow™ program must experience at least a 0.5% reduction in their interest rate, as well as a drop in their total mortgage payment. Another advantage of the RefiNow™ program is that individuals who qualify will get a $500 credit for a home appraisal if one is required.
It is crucial to remember that when qualifying for RefiNow™, the lowest median credit score is considered, even if the loan has numerous customers. The lowest median FICO® Score among all loan borrowers must be less than 580.
Does Freddie Mac Issue Loans Directly?
Freddie Mac does not provide direct loans to house purchasers, but rather purchases packaged mortgages from banks and other mortgage originators. Banks may increase their ability to lend to more Americans if they package mortgages and sell them to Freddie Mac as mortgage-backed securities.
When you pay your mortgage each month and your loan is guaranteed by Freddie Mac, the money you pay is sent from your mortgage servicer to Freddie Mac. Finally, Freddie Mac will pool your payment with others, deduct a small charge, and disperse the remainder to the investors who originally purchased the mortgage-backed securities.
How Does Freddie Mac Affect The Mortgage Market?
Freddie Mac has a generally beneficial impact on the mortgage market. Mortgage originators would be forced to keep mortgage loans in-house if Freddie Mac did not exist.
As a consequence, these businesses would bear all of the risk and tie up their cash. This would raise the interest rates required by banks to earn a profit, driving up the overall cost of homeownership throughout the nation.
Ginnie Mae vs. Fannie Mae vs. Freddie Mac
Ginnie Mae does have some parallels to Fannie Mae and Freddie Mac. They all acquire mortgages to bundle into an MBS, which is sold on the bond market. This creates liquidity in the mortgage market and helps keep homes affordable. Both Fannie Mae and Freddie Mac were likewise formed with government charters, therefore they emerged out of comparable areas with the same objective.
A fundamental distinction between Fannie Mae vs Freddie Mac and Ginnie Mae lay in the sorts of mortgages they acquire. Fannie Mae and Freddie Mac support mortgages known as conventional loans. These need a minimum credit score of 620. Interest rates on these loans are often lower than those on many government loans since credit scores are higher and applicants are frequently more qualified.
From the standpoint of someone trying to secure a mortgage, traditional mortgages provide down payments as little as 3%, while a 20% down payment will allow you to eliminate mortgage insurance totally. Even better, after you achieve 20% equity, you may request that your mortgage insurance be removed.
Efforts to remove Freddie Mac and Fannie Mae from the Federal Housing Finance Agency’s (FHFA) conservatorship have come and gone. For the time being, the status quo prevails.
Ginnie Mae purchases government-backed mortgages in order to offer new cash to the mortgage sector, allowing it to make additional loans and further the aim of affordable housing. After purchasing the mortgages, loans with comparable characteristics are bundled into MBSs and sold to investors on the bond market. GNMA agrees to support the bonds even if the loans fail.
Ginnie Mae backs FHA, VA, and USDA loans, as well as the Section 184 lending program, to assist Native Americans become homeowners. Fannie Mae and Freddie Mac are government-backed GSEs, but they are not government institutions in and of themselves. They purchase traditional loans.
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