When you begin to apply for a mortgage loan or even just research what you should know about current mortgages and what is out there, you will no doubt hear or read the words Freddie Mac and Fannie Mae.
Fannie Mae and Freddie Mac are the financial entities that fuel and power the entire mortgage loan industry. Those are their short or nick names, their official names are the Federal National Mortgage Association which the acronym is FNMA and sounds like Fannie Mae and the Federal Home Loan Mortgage Corporation, FHLMC, Freddie Mac.
Though they have government sounding titles they actually both started as shareholder-owned and for-profit companies. The government took over their control following the big mortgage crisis of 2008. Currently, shareholders are trying to regain control as they have paid back more than the money used to bail them out according to ProPublica.
No matter who is in current control, Fannie Mae and Freddie Mac still spearhead most of the underwriting decisions that lenders decide to follow across the mortgage market. Knowing more about how these companies work will help you to navigate the mortgage application process.
Both Fannie Mae and Freddie Mac are GSEs
A GSE is a government-sponsored enterprise. This means both companies were created by congress and authorized to perform crucial functions on the government’s behalf. They have a duty to provide liquidity, stability, and affordability to the mortgage market. The Federal Housing Finance Agency or FHFA oversees the two.
What Fannie and Freddie Do
Both Fannie Mae and Freddie Mac purchase about half of all mortgage loans from lenders after they close them with a borrower. This provides lenders with money to make more loans available. Since lenders want Fannie and Freddie to purchase their loans, they make their loan requirements match up with the requirements that Fannie and Freddie set.
A large number of the loans these GSEs purchase are packaged or bundled and sold as mortgage-backed securities into the bond market.
Qualifying Requirements of Fannie Mae and Freddie Mac Loans
While they are two separate companies, their qualification guidelines are nearly identical. They set basic terms that most lenders use including debt-to-income ratio and required down payment. Conventional loans that meet these standards require a borrower to have at least a 620 credit score and to avoid having to spend extra money on the purchase of mortgage insurance a borrower needs to put 20% of their own cash into the purchase as a down payment.
Mortgages must also me conforming loans not jumbo loans. The average conforming loan limit is about a half-million dollars except for high cost areas like many places in California.
Some Frequently Asked Questions About Fannie Mae and Freddie Mac
Are they the Same as the FHA? Neither of these companies is the FHA (Federal Housing Administration). The FHA is a government agency that is specifically geared toward offering loan options to citizens with moderate to low incomes. An FHA loan has a more relaxed credit rating requirement as well as down payment.
What is the Difference between these Loans and Conventional Loans? Nothing really. Conventional loans are the types of loans that Fannie and Freddie purchase from banks that originate loans.
What are the Benefits of These Loans? Fannie and Freddie offer competitive interest rates and lower down payment options. The biggest benefit is most lenders prefer to make these types of loans because it is easy to guarantee they will be purchased so the bank can continue to be in business.
Can You Get a Loan Directly from Them? No, they only work by purchasing loans from lenders.
How do I Know if my Loan is a Fannie or Freddie Loan? Most likely you will not be told this information. They do not originate (offer and approve) or service (take payments, answer questions, make modifications, send late notices, etc.) loans. At times they might assist a lender or servicer with the loan when a borrower seeks help or relief in monthly payments. You can search for whether your loan is owned by one of them by heading to their websites.
Contact me at any time for more information on available mortgage options in Mission Viejo and California right now. I am here to help find the best options for you.
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