Whether you’re a first-time homebuyer or a longtime homeowner, you have likely heard the name Fannie Mae. Although you might work directly with a bank or other lender to obtain a mortgage, your loan may be packaged and sold to Fannie Mae.
Here’s more about Fannie Mae, including how it functions and how it affects you.
[Read: Best Mortgage Lenders.]
What Is Fannie Mae?
The Federal National Mortgage Association is commonly known as Fannie Mae, which picked up its name from the acronym FNMA — FN for Fannie and MA for Mae.
The U.S. government created Fannie Mae in 1938 during the Great Depression to help provide ready access to funds on reasonable terms to mortgage lenders. A rash of loan defaults had drained funding for new loans.
Originally, Fannie Mae was a federal agency, and it purchased Federal Housing Administration-backed loans from private lenders to give them cash to make new loans. It later became authorized to buy loans backed by the Department of Veterans Affairs, or VA, as well as conventional mortgages.
Now known as a government-sponsored enterprise, or GSE, Fannie Mae is privately owned but federally supported. Fannie Mae does not lend money directly to consumers but backs many types of mortgages through the secondary loan market, where banks resell loans to investors.
Freddie Mac vs. Fannie Mae: What Is the Difference?
Congress created the Federal Home Loan Mortgage Corp., better known as Freddie Mac, in 1970 as a way to expand the secondary mortgage market in the United States. Fannie’s sister company functions similarly but buys mortgages from smaller banks and credit unions rather than large retail banks.
Neither Freddie Mac nor Fannie Mae makes loans directly to homebuyers. The corporations either buy mortgages from lenders and hold them in their portfolios, or package loans and resell them to investors as mortgage-backed securities, or MBS.
This shifts a portion of the credit risk to private investors and frees up capital for lenders to make more loans to qualified borrowers. Both Freddie Mac and Fannie Mae aim to keep mortgage money flowing, support the stability of the housing market and promote housing affordability. However, they have operated under the conservatorship of the Federal Housing Finance Agency since the housing and financial crisis of 2008.
[Read: Best Mortgage Refinance Lenders.]
How Does Fannie Mae Work?
Because Fannie Mae doesn’t originate loans, you cannot get a mortgage directly from Fannie.
Once lenders approve and close home loans, Fannie Mae either buys loans that meet its requirements from lenders or repackages them as MBS that can be sold. Lenders use the money they get from selling the mortgages to make more loans.
Lenders can package and sell whole loans, or single loans, to Fannie Mae for cash through a process called securitization.
Fannie Mae has established underwriting criteria for loans it is willing to purchase and guarantee from consumer banks. These guidelines reduce the risk to Fannie Mae and make the loans more attractive for investors.
“It is best to think of Fannie Mae as an insurance company,” says Doug Duncan, senior vice president and chief economist at Fannie Mae. “A lender makes a mortgage loan to someone who wants to buy a house and then packages it with some other similar mortgages.”
What Is Fannie Mae’s Role With Mortgage-Backed Securities?
Fannie Mae buys home loans from lenders and combines them into different mortgage-backed securities, each containing loans with similar features. Fannie guarantees the timely payment of principal and interest to the investor that buys the security, Duncan says.
Even if a borrower misses payments, Fannie Mae guarantees the mortgage.
Brian Gilpin, senior vice president and treasurer, head of capital markets at Embrace Home Loans Middletown, Rhode Island, compares the Fannie Mae guarantee to a Hershey’s wrapper on a chocolate bar.
“That brown and white wrapper around a chocolate bar symbolizes a certain type of chocolate, flavor and quality, no matter where you find them in the world,” he says. “A Fannie Mae label on a mortgage or group of mortgages indicates a certain quality of borrower and underwriting standards. Fannie Mae, in a larger sense, is a seal of approval indicating a certain quality, just like a Hershey bar.”
What Are Fannie Mae’s Mortgage Programs?
Fannie Mae offers mortgage programs through approved lenders for first-time and repeat buyers with low and moderate incomes. Here are a few options.
First-time homebuyers or homeowners who want to refinance can access a mortgage with as little as 3% down. Down payments can come from many sources, such as gifts and grants, and income from co-borrowers who won’t live in the home, as well as renters, can be factored into approval.
You will need to pay private mortgage insurance until you have 20% equity in the home.
This loan allows buyers to include money for renovations and repairs when they purchase or refinance homes. Borrowers can obtain up to 75% of the purchase price, plus renovation costs, or the “as completed” value of the property with the improvements.
HomeStyle Renovation can be combined with either HomeReady or HomeStyle Energy loans for energy- or water-efficiency upgrades.
First-time and repeat buyers with plans to make their homes more energy-efficient can apply for a HomeStyle Energy mortgage.
You can borrow up to 15% of your home’s appraised value with improvements for purchases such as solar panels, upgraded water heaters and energy-saving windows. The loan can also be used to finance features such as storm-surge barriers, retaining walls and foundation retrofitting for earthquakes, which can protect your home in disaster-prone areas.
[Read: Best FHA Loans.]
Who Qualifies for a Fannie Mae Loan?
Many factors determine whether you will qualify for one of Fannie’s mortgage programs. Fannie Mae sets both property and borrower eligibility requirements, including:
— Down payment. You could qualify for a fixed-rate HomeReady mortgage with a 3% down payment, but you will need a 5% down payment for a HomeReady adjustable-rate mortgage.
— Cash reserves. You’ll also need enough cash in your bank account to make mortgage payments for two to six months, depending on the loan.
— Debt-to-income ratio. Fannie Mae permits a DTI — the percentage of how much you spend on debt each month compared with how much you earn — of 36%. Borrowers with strong credit scores and sufficient cash reserves might be approved with DTIs of up to 45%.
— Property type. Generally, Fannie Mae loans are available for one- to four-unit properties. You can use a HomeReady mortgage to buy a principal residence, but a HomeStyle mortgage can apply to a second home or an investment property.
If you can’t qualify for a Fannie Mae loan, you could look at Federal Housing Administration loans, which have less stringent approval requirements.
Generally, Fannie Mae loans may appeal to a certain type of buyer.
“Fannie Mae does have some loan programs with special features targeted to first-time homebuyers,” Duncan says.
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