What are Fannie Mae and Freddie Mac Loans?
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are both Government Sponsored Enterprises (GSEs), which means they are backed by the government but they are not part of the government. Fannie Mae and Freddie Mac don’t directly offer mortgage loans but instead buy the mortgages from banks, credit unions, and other financial institutions so that they, in turn, can lend to more homeowners. Even after the mortgage is sold, the original lender can often still be the servicer for the loan.
What Are the Requirements for Fannie Mae and Freddie Mac Loans?
Fannie and Freddie purchase bundles of these conforming mortgage loans from banks, which means the loans must “conform” to the rules set by the GSEs.
Lenders want these mortgages to be eligible for purchase, so their loan guidelines are often very similar, if not identical, to guidelines set by Fannie and Freddie. So when you apply for a mortgage loan at a bank, it’s a good idea to know what these guidelines are.
One factor that determines your eligibility is your debt to income ratio. To calculate your debt to income ratio take your total debt payment and divide it by your total monthly income. For example, if you have a total monthly debt of $2,000 and a monthly income of $6,000, your debt to income ratio is 33%. Current guidelines allow a debt to income ratio up to 45%.
Credit Score for Fannie Mae and Freddie Mac
Fannie /Freddie loans require a minimum FICO credit score of 620 to qualify, but the approval process for applicants with credit scores between 620 and 660 may take longer than higher scores.
Required Down Payments
Many potential home owners think that 20% down is the only option when buying a home, unfortunately that is just a common misconception, there are many options out there.
As of December 2014, the current minimum down payment for a Fannie Mae loan is now as little as 3% of the purchase price through their My Community Mortgage product. Freddie Mac loans will also allow down payments as low as 3%, but won’t be available until March 2015. These new policy changes loosened mortgage purchase guidelines to encourage lenders to offer mortgages to more borrowers, even those with less than perfect credit.Fannie Mae also offers a program for borrowers who purchase a property in need of moderate renovation called the HomeStyle Renovation loan. The loan is for the purchase and the cost of renovations and offers a down payment as low as 3% (no mortgage insurance with 20% down). It is available for the purchase of a primary residence, a second home, or investment property.
In most cases with a Fannie Mae or Freddie Mac loan you can even avoid paying expensive monthly PMI (Private Mortgage Insurance) if you’re working with the right Mortgage Lender. Generally this consists of a slight increase in your interest rate, but results in a significantly lower monthly payment. Additionally, with this option you can roll the closing costs into your offer and have the seller contribute towards them or ask the Lender to offer you an option in which they pick up the tab on the closing costs. This will reduce the money needed by the borrower to just the down payment contribution. A buyer can qualify for all these options with less than perfect credit.
The 3% down options are restricted to buying a primary residence and single family home with a conventional mortgage. Some of the guidelines for the 3% down mortgage program include:
- Terms of up to 30 years
- No income limit
- Homebuyer counseling is not required
- Down Payment and Reserves can be Gifted
- Purchase transactions require at least one homebuyer to be a First Time Homebuyer (FTB) – which is defined as not having ownership in a property at any time within the lat 3 years
These rules also include a limit on the amount of loan money the GSEs will guarantee, known as the “conforming loan limit.” Loans that are larger than these loan limits are known as non-conforming or “jumbo” loans. Jumbo loans are not guaranteed by the GSEs, so they may have higher interest rates than conforming loans, although right now jumbo rates are actually lower than 30 year conforming loan rates.
Use our mortgage calculator to figure out how much your monthly payment would be.
2015 Fannie Mae / Freddie Mac loan limits for Massachusetts and New Hampshire:
Where Can You Get A Fannie Mae or Freddie Mac Loan?
You can go to your local bank, credit union, or financial institution and apply for a conventional mortgage. Though the bank may ultimately sell the mortgage to Fannie or Freddie, they will make the final decision as to whether you are approved or not.
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