Whether you’re a first-time homebuyer or someone looking to ditch their current dwelling for a new one, you’ve probably heard of Fannie Mae and Freddie Mac. Fannie and Freddie are government-sponsored enterprises that play an important role in the mortgage market.
There are many similarities between the two organizations, but notable differences as well. Let’s look at how Fannie Mae and Freddie Mac work and how they’ve impacted the home-buying process.
What Is Fannie Mae?
The Federal National Mortgage Association, or Fannie Mae, was chartered by the U.S. government in 1938. Fannie Mae was established as part of the New Deal with the goal of making housing more affordable and accessible to the general public.
In the early 1900s, buying a home was next to impossible for the average person since most loans were short-term and required large down payments. Fannie Mae transformed the housing industry by introducing the 30-year fixed-rate mortgage.
“Fannie Mae created the long-term, fixed-rate mortgage loan with the ability to refinance at any time,” says Seamus Nally, CEO of TurboTenant. The organization also buys mortgages on the secondary market and pools them to create mortgage-backed securities.
[Read: Best Mortgage Refinance Lenders.]
What Is Freddie Mac?
The Federal Home Loan Mortgage Corp., or Freddie Mac, was founded in 1970 to support the U.S. housing system and keep mortgages affordable. Freddie Mac buys a large number of mortgages from lenders and either holds the loans in its portfolio or sells them as mortgage-backed securities.
“Freddie Mac came later, under the Emergency Home Refinance Act,” says Nally. “Its overarching goal was to expand the secondary mortgage market while also creating more competition for Fannie Mae and reducing banks’ interest rate risks.”
Fannie Mae vs. Freddie Mac
Fannie Mae and Freddie Mac don’t offer mortgages directly to homebuyers. You’ll need to apply for a loan through a mortgage lender, and then that lender may sell the loan to Fannie or Freddie.
Both Fannie Mae and Freddie Mac strive to bring liquidity and stability to the mortgage market, but they do this in slightly different ways. “Fannie Mae buys loans from larger commercial banks and lenders, while Freddie Mac targets loans from smaller banks or credit unions,” says Ohan Kayikchyan, CFP® and money coach at Ohan The Money Doctor.
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Fannie Mae and Freddie Mac Mortgage Programs
Fannie Mae and Freddie Mac each have their own distinct loan programs that are issued by outside lenders. Here’s an overview of the main programs offered:
Fannie Mae Programs
— HomeReady: This mortgage can be used to buy or refinance your home and is designed for creditworthy low-income borrowers. You could qualify for a $2,500 credit that can be used toward a down payment or closing costs.
— HomeStyle Renovation: This loan lets you include funds for renovations and repairs when you buy or refinance your home. You can finance up to 75% of the purchase price and renovation costs or the “as completed” appraised value.
— HomeStyle Energy: This mortgage lets you borrow up to 15% of your home’s appraised value to make energy improvements. You can use the funds to purchase solar panels, upgraded water heaters and energy-saving windows. This loan can be combined with a HomeStyle Renovation or HomeReady loan.
Freddie Mac Programs
— HomeOne: These loans are available for qualified first-time homebuyers. It comes with a required down payment of just 3% and flexible financing options.
— Home Possible: This program is available to very low-income borrowers whose income doesn’t exceed 80% of the median area income. You can make a down payment as low as 3%, and the loan has flexible credit requirements.
— CHOICERenovation: This program lets you finance your home purchase and renovation costs in a single closing transaction.
[Read: Best Mortgage Lenders]
Who Qualifies for Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac each have their own eligibility requirements for mortgage approval.
— Down payment: A minimum down payment of 3% is required.
— Credit score: Both Fannie Mae and Freddie Mac require a minimum credit score of 620 for fixed-rate mortgages. However, you may need a higher credit score for certain loan programs or to obtain better interest rates.
— Debt-to-income ratio: Fannie and Freddie usually require a minimum debt-to-income ratio of 43%, though an exception may be made for certain borrowers.
— Income requirements: You must be able to show that you have a stable income and are able to repay the loan. You may also need to show that you have a cash reserve of two to six months available.
[Read: Best Adjustable-Rate Mortgage Lenders.]
The Impact of Fannie Mae and Freddie Mac on Homeowners
Even though they don’t offer loans directly to consumers, Fannie Mae and Freddie Mac continue to help homeowners by keeping the housing market affordable and stable. “Both companies provide liquidity for lenders to make affordable home loans available to residential mortgage borrowers,” says Kayikchyan.
Fannie and Freddie create inexpensive financing options and low down payment programs for borrowers. The two organizations help set the borrowing standards and create more competition among lenders to assist in lowering interest rates.
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What Are Fannie Mae and Freddie Mac? originally appeared on usnews.com
