Here’s Why Fannie Mae and Freddie Mac Matter When Seeking a Mortgage
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Fannie Mae and Freddie Mac are the financial fuel that power the mortgage loan industry. The two entities are officially named the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac).
These organizations, which influence many of America's home loans, are shareholder-owned companies regulated by the U.S. government.
Fannie and Freddie drive many of the underwriting decisions lenders make by setting price and qualification standards, and knowing more about how they work may help you navigate the mortgage application process.
Government-sponsored enterprises
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs). That means they were created by Congress and function on the government's behalf to provide "liquidity, stability and affordability to the mortgage market," says the Federal Housing Finance Agency, which oversees Fannie and Freddie.
What Fannie Mae and Freddie Mac do
Fannie and Freddie buy about 70% of the mortgage loans that lenders make, according to the National Association of Realtors. This provides lenders with the capital to make more loans. Because lenders want to sell their loans to the GSEs, they structure mortgages to Fannie and Freddie standards.
Many of the mortgages that Fannie and Freddie buy are then assembled and sold into the bond market as mortgage-backed securities. Bonds are an investment option much like the stock market, but relative to the stock market, bonds are considered safer and less volatile.
» MORE: Conventional loan requirements
How to qualify for a loan approved by Fannie Mae or Freddie Mac
While separate companies, Fannie's and Freddie's home loan guidelines are nearly identical and establish some of the basic terms of home loans, including the debt-to-income ratio and the required down payment.
Generally, conventional mortgages that meet Fannie or Freddie standards require a minimum credit score of 620. Making a down payment of at least 20% will let you avoid mortgage insurance, but it’s possible to get a conventional mortgage with a down payment as low as 3%.
» MORE: How much house can you afford?
Mortgages also must be below the conforming loan limit to meet Fannie and Freddie guidelines. That's typically $726,200, except in high-cost areas. Borrowers who need larger loans can shop for jumbo mortgages.
