Fannie Mae (FNMA): What it is and how it affects your mortgage
What is Fannie Mae?
Fannie Mae – short for the Federal National Mortgage Association – dominates the secondary mortgage market. but what does that mean exactly?
Along with her counterpart, Freddie Mac, Fannie Mae buys around 66% of US mortgages from the lenders who originated them.
This frees up money so these companies can continue to lend and buyers can continue to buy homes.
In large part, Fannie Mae and Freddie Mac also drive the rate you get from your mortgage lender. Both play an important role in keeping US mortgage rates relatively low.
Check your new rate. Start here (February 10, 2022)
What does Fannie Mae do?
Fannie Mae is a major player in the mortgage process, yet very few borrowers understand what it really does.
There are no branches or ATMs. You can’t borrow money from him. And yet, like magic, the interest rate you pay and the type of mortgage financing you get are greatly impacted by Fannie Mae.
To understand how Fannie Mae works, think of a local bank or building society.
If Smith Lending has $25 million that he can use to create mortgages – and if the typical mortgage is $200,000 – then Smith has the ability to generate 125 mortgages. ($200,000 x 125 = $25 million.)
In this example, if you are mortgage customer number 126 at Smith Lending, you are out of luck. There is no more money to lend.
This is where Fannie Mae and the secondary mortgage market come in.
How Fannie Mae and the Secondary Mortgage Market Work
Fannie Mae and Freddie Mac operate in the secondary mortgage market.
There, they buy mortgages from lenders and repackage them into mortgage-backed securities (MBS). Fannie and Freddie then sell MBS to investors around the world.
Going back to the example above: the 125 mortgages that Smith Lending sold are actually an asset. Smith can take those loans and sell them to Fannie Mae or Freddie Mac.
Once the sale is complete, Smith has new funds and can now fund additional mortgages in the local community.
You can see the benefit. By buying mortgages, Fannie Mae and Freddie Mac allow lenders to make more loans. With more money available for loans, consumers continue to buy homes and the real estate market remains afloat.
Additionally, these companies are taking money from global investors and putting it into the US real estate market.
More money for mortgages means – you guessed it – lower mortgage rates. Since Fannie and Freddie operate nationally, the result is that mortgage rates are largely similar across the country.
How Fannie Mae affects your mortgage
Fannie Mae is happy to buy mortgages from lenders – but not all mortgage.
For Fannie Mae and Freddie Mac to resell loans, they must be considered safe investments. This means that each mortgage must meet certain requirements or “guidelines”.
Fannie Mae’s guidelines are over 1,200 pages. For example, for 2022, the maximum loan limit that Fannie Mae will purchase is $. The company will not buy larger loans, called “jumbo” financing.
Through these types of guidelines, Fannie Mae plays an important role in deciding which mortgage applicants are considered “eligible” and which are not.
Fannie Mae Guidelines: Conforming and Conventional Mortgages
Loans that conform to Fannie Mae and Freddie Mac guidelines are called (unsurprisingly) “conforming” mortgages.
Another term you may have heard is “conventional” financing. A conventional mortgage is simply a non-government mortgage. These loans are not backed by the FHA, VA or USDA.
Indeed, it is possible for a mortgage to be both “conforming”, i.e. complying with the Freddie/Fannie guidelines, and “conventional”, i.e. uninsured or guaranteed. by a government program.
Fannie Mae and Freddie Mac guidelines are important in the mortgage world.
These requirements may include items such as:
- Home loan amount (limits vary by state)
- Minimum credit score requirement (usually 620)
- Down payment requirements (can be as low as 3%)
- Private mortgage insurance (mandatory with less than 20% down payment)
- Debt to income ratios (generally up to 43% is allowed)
However, as a borrower, you should also be aware that the guidelines are often not absolute.
If you have a lot of monthly bills, for example, your debt-to-income ratio (DTI) could be high. In theory, this would make it difficult to obtain a conforming loan. However, “offsetting factors” like a large down payment or a hefty savings account could help offset this DTI and allow you to qualify.
In short, Fannie Mae and Freddie Mac’s loan guidelines are often less stringent than borrowers might think.
Flexible Home Loans Backed by Freddie Mac: The HomeReady Mortgage
A Fannie Mae program with many exceptions to the usual guidelines is the HomeReady Mortgage.
Instead of 5% down payment, you can qualify for the HomeReady program with just 3% upfront. Need more income to qualify? Up to 30% of the buyer’s income can come from a roommate. And no, you don’t have to be a first-time buyer.
For more information on Fannie Mae products and services, contact Loan Officers. Ask about compensation factors if you need them.
Does Fannie Mae belong to the government?
Fannie Mae (FNMA) was started by the federal government in 1938. It was designed to help revive the housing market after the Great Depression.
Because Fannie was started by the government, it is known as a “government sponsored enterprise” or GSE.
Fannie Mae was sold to shareholders in 1968 and is now publicly traded over-the-counter. It is now the 22nd largest company in the United States by revenue according to Fortune.
Fannie Mae now has private shareholders. However, in 2008, Fannie Mae and Freddie Mac were placed in federal conservatorship after the mortgage crisis.
According to ProPublica, Fannie received $120 billion from the federal government and repaid nearly $185 billion. As of this writing, it is still operated by the federal government, an issue disputed in court.
Show me today’s rates (February 10, 2022)
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.