If you have a mortgage on your home, there’s a good chance that either Fannie Mae or Freddie Mac owns the loan. Owning 62% of conforming loans in 2020, these government-sponsored enterprises play a vital role in the housing market and therefore the economy.
When you’re doing research to purchase your first home, learning about loan options can be incredibly overwhelming. For people who aren’t real estate professionals, it can feel like everything you’re reading is written in a different language! One of the most important things is distinguishing between which information you need to understand, and which information is best left to the mortgage lender, your real estate agent, and your lawyer.
What's in this article?
If you’re shopping around for a mortgage, you might be wondering how to get a Fannie Mae loan.
Let’s look at everything you need to know (and nothing you don’t) about Fannie Mae loans and how they can help you borrow money to buy a house.
What Are Fannie Mae Loans?
Fannie Mae is a corporation that is aligned with the government. It exists to help individuals have the opportunity to secure mortgage financing that is affordable. Its mission is to provide the housing market with “liquidity, stability, and affordability.”
Basically, Fannie Mae helps ensure that both retail lenders and banks can quickly fund mortgage loans for homeowners, and therefore plays an important role in the issuance of loans. They also abide by approved guidelines that help to provide market stability and reduce their risk.
Fannie Mae doesn’t give out loans or originate loans to homeowners. On the secondary mortgage market, however, it does both buy and guarantee mortgages. Once they buy the loans, they bundle them together in order to sell them off to investors.
Loans that adhere to the standards of Fannie Mae and a similar enterprise, Freddie Mac, are referred to as conforming loans.
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Why Does Fannie Mae Exist?
Fannie Mae was created by Congress, as was a similar government-backed organization known as Freddie Mac. The role of both of these companies is to purchase mortgages and sell them to investors, helping to free up cash for mortgage companies, banks, and other lenders to fund further home purchases. This also helps to stabilize the lending market and keep down interest rates.
Fannie Mae was first established all the way back in 1938, while Freddie Mac was first created a few decades later in 1970. Both Fannie Mae and Freddie Mac have created options for relief amidst the Coronavirus pandemic. This includes the option to create a repayment plan and the reduction of monthly payments.
What Are the Fannie Mae Loan Requirements?
A mortgage lender must comply with something known as the Statement on Subprime Lending if they want to do business with Fannie Mae. This is a statement issued by the federal government that addresses a number of the risks that are associated with subprime loans, including:
- Very high limits on interest rate increases
- Low intro rates followed by increased variable rate
- Little to no documentation of a borrower’s income
There are strict criteria that the mortgages that Fannie Mae purchases must meet. There are limits for conventional loans on single-family houses, though how much this limit is can vary depending on the cost of living in your area.
In order to get a Fannie Mae loan, you have to apply for a mortgage through an approved lender. Lenders must meet underwriting and eligibility criteria in addition to avoiding subprime loans as mentioned above. This ensures that there is sufficient credit quality to justify the financing.
If you make a down payment of less than 20%, private mortgage insurance (PMI) is usually required.
How to Apply for a Fannie Mae-Backed Loan
The first step you will want to take in order to apply for a Fannie Mae-backed loan is to find an eligible lender. They will help you fill out a Uniform Residential Loan Application and you will also need to collect relevant documentation and financial information. This includes your gross income and statements, as well as a record of employment.
Additionally, you will have to provide information on your total monthly debt obligations. This might include car payments, credit card balances, child support, and alimony.
A lender commonly looks for borrowers that spend no more than 28% of their monthly income on housing expenses. Additionally, they look for borrowers that spend no more than 36% on paying back debts.
The maximum debt-to-income ratio allowed by Fannie Mae is 36%. However, if the borrower meets reserve and credit score requirements this ratio can be as high as 45%.
You can choose to make a larger down payment if your debt-to-income ratio is too high. This will also help to reduce how much money you put towards housing every month.
There are also minimum credit requirements that you will have to meet if you want to be eligible for a Fannie Mae-backed loan. If you are hoping to buy a single-family home as your primary residence, fixed-rate loans require a FICO score of at least 620. Adjustable-rate mortgages require a score of at least 640.
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Fannie Mae loans are an important resource in our country to help keep the housing market in good health. Understanding how they work and why they exist can be a helpful introduction to the mortgaging process for buying a home.
For most people, buying a home is the biggest purchase they’ll make in their entire life. Considering that, it’s worth finding the right mortgage lender to work with to help the process go smoothly. If it’s time for you to find the lender that’s right for you, you can learn more about our loan process here.