For decades, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) have piloted the mortgage industry for the average homebuyer. Although the two government-sponsored organizations do not actually make the loans, they play a significant role in mortgage acquisition by purchasing the loans from private mortgage lenders.
Whether the government-sponsored enterprise (GSE) buys its loans from big commercial banks, like Wells Fargo, or smaller financial companies, lenders assume less risk with government backing—comparatively speaking. This means that Fannie Mae or Freddie Mac will pay the lender even if a borrower defaults on payment. It can also mean a great return for borrowers because less risk could mean lower return (and a lower overall interest rate). It’s important to remember, however, that less risk does NOT mean no risk for lenders, so lowered interest rates are not always the case. In fact, in some instances, the GSE will require a “buy back” of the mortgage to the lender that sold them the loan.
As GSEs, Fannie Mae and Freddie Mac must obey the government’s established lending guidelines—otherwise known as conforming loans. According to these guidelines, the loan limits are the same for both enterprises. Fannie Mae and Freddie Mac both also offer fixed-rate and adjustable-rate mortgages to finance the purchase, renovation, or refinance of primary residences, second homes, and even investment properties.
With so many similarities, you’re probably wondering, “What’s the difference between Fannie Mae and Freddie Mac?” The majority of their differences are actually found within their specific loan programs. Fannie Mae, for example, offers the HomeReady loan, which presents a low down payment option and restricts borrower income to a maximum 80 percent of area median income. The HomeReady borrower must reside in the home to qualify only if the down payment is less than five percent. Freddie Mac offers a similar program, known as the Home Possible loan. This loan is limited only to those with a maximum 100 percent of area median income, or who would like to purchase, renovate, or refinance in “underserved” areas. This borrower must live on the property in order to qualify, no matter the size of the down payment.
When it comes to standard loans, Fannie Mae’s minimum down payment differs based on the fixed-rate or adjustable-rate mortgage. Freddie Mac, in turn, requires a minimum down payment of five percent for all standard loan programs.
When deciding between Fannie Mae and Freddie Mac’s programs, it’s important to understand all of the loan’s requirements. For more information about home loans, or to learn more about an individual loan program to help make your decision, contact one of our mortgage specialists today.
