What Is Fannie Mae?
Fannie Mae is a government sponsored enterprise (GSE) that makes homeownership possible for millions of Americans. If you’re interested in buying a home, you’ll likely hear this name discussed quite a bit. But what is Fannie Mae, and why should you care?
Fannie Mae makes obtaining a mortgage possible for low and moderate income borrowers. Although Fannie Mae makes homeownership a reality for many Americans, it's important to note, Fannie Mae does not issue the borrower money directly. Fannie Mae operates in the secondary mortgage market.
How Does Fannie Mae Work?
Fannie Mae’s role in the secondary mortgage market is to add liquidity, or cash, to the marketplace. Instead of issuing the loans directly to the borrower, Fannie Mae repurchases the loan the lender issued, and guarantees the loan in the secondary mortgage market.
What Is The Primary Role Of Fannie Mae?
Created in 1938, Fannie Mae has grown to be a well known and respected name in the real estate business. In 2019, Fannie Mae’s revenue exceeded 120 billion dollars. Although the business has been around for many years, during the housing crash in 2007, Fannie Mae needed to be bailed out by the United States government. Since the bailout, Fannie Mae has reworked their requirements to ensure the company reduces its overall risk profile.
What is the primary role of Fannie Mae? Fannie Mae exists to add liquidity to the mortgage market. Fannie Mae buys loans large commercial banks issued to a borrower. As a result, these banks receive cash upfront, and can issue more loans to new borrowers.
Without Fannie Mae, these banks wouldn’t have the cash flow to issue more loans. This side effect would have a ripple effect. Less people would be able to purchase a home, resulting in an overall softening of the United States economy.
Once the loan is repurchased by Fannie Mae they will roll, or combine, various loans together in a package known as a mortgage backed security. Fannie Mae guarantees the principal and interest payment when they resell their mortgage backed security, or MBS, to the various investment banks, pension funds or insurance agencies.
What Is A Fannie Mae HomePath Property?
If you’re searching for a home, there are many options to choose from. One of those options is to purchase a HomePath Property.
What is a HomePath property? A HomePath property is a program that Fannie Mae offers.
Individuals purchasing foreclosed properties may receive financial assistance to do so, contingent on if the property is owned by Fannie Mae or not. If in fact the property is owned by Fannie Mae, one will likely receive a good deal on the property as Fannie Mae isn’t in the business of owning or maintaining physical properties.
How Much Of A Down Payment Do I Need For A Fannie Mae Loan?
The minimum down payment on a Fannie Mae loan is 5%, unless the loan is through the HomePath program which would then require a minimum of 3% down.
How Do You Get Approved For A Fannie Mae Loan?
Considering Fannie Mae guarantees these loans in their MBS product, the loans that Fannie Mae purchases must meet specific criteria. Not only does the down payment need to be 5%, but there are various other financial metrics and ratios Fannie Mae will use before accepting to purchase a loan.
One’s credit score will be one of the first financial metrics in review. Fannie Mae has a minimum accepted credit score for both adjustable rate mortgages and fixed rate mortgages. If you’re financing through an adjustable rate mortgage, your FICO score must be at least 640. If you plan on financing with a fixed interest rate loan, your credit score must be at least 620.
Debt to income is another important financial ratio. Simply put, this financial ratio looks at all of your monthly debt expenses and divides that figure by your total monthly income. Fannie Mae has a debt to income requirement of no more than 36 percent. If your debt to income exceeds 36%, you’ll have to meet various other criteria to see if you can still qualify for a loan.
What Are The Benefits Of A Fannie Mae Loan?
There are two main benefits when considering a Fannie Mae loan. First and foremost, for those that qualify, the interest rates will be rather competitive. A slight difference in interest can be quite a bit of money over the lifetime of the loan, so in many instances, the more competitive the rate is - the better.
In addition to lower interest rates, one may qualify for these loans with a low down payment. A down payment of 5% is a lot less than other financing options, which makes purchasing a home more realistic for millions of Americans.
Freddie Mac vs. Fannie Mae?
Fannie Mae and Freddie Mac are both very similar. They are often referred to as ‘relatives’ in the real estate industry. However, there are certainty differences between the two.
Freddie Mac serves smaller thrift mortgage lenders. When you think Freddie, consider a smaller credit union, private mortgage lending company, or boutique banks. Freddie Mac also operates in the secondary mortgage market, but they only purchase mortgages from these smaller thrift or boutique lenders.
Fannie Mae on the other hand serves the large retail banks. These banks are often well known, nationwide, and have a tremendous customer base.
Both Fannie Mae and Freddie Mac are government sponsored enterprises that add liquidity to the mortgage market. Fannie and Freddie provide cash to lenders, allowing the lenders to issue more mortgages.
Put Your Knowledge to Work
If you have low to moderate income and still want to purchase a home, you may hear the name Fannie Mae discussed a lot during your borrowing experience. On the back end, Fannie Mae operates in the secondary mortgage market, and although they will not issue your loan directly to you, they will purchase the loan from the lender who issued it to you. As long as you meet the various requirements Fannie Mae put in place, the lender will be comfortable lending you the money knowing they will be able to resell your loan to Fannie Mae.
Fannie Mae aggregates numerous different mortgages together and creates a product known as a mortgage backed security. This security is sold to the investment world.Pension funds, insurance agencies, and investment banks are interested in these mortgage backed securities as Fannie Mae guarantees the principal and interest payment.
This page last updated: March 21, 2022
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