The Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation – better known as Fannie Mae and Freddie Mac– are household names for home loans. But did you know that these companies do not originate or service mortgages?
Instead, Fannie Mae and Freddie Mac buy, insure, and sell mortgages to keep the mortgage market liquid. Before these companies, lenders were not able to provide long-term, fixed-rate mortgages.
The companies do not start or maintain mortgages, so you cannot apply directly through either company. Banks and other lenders have mortgages that meet Fannie Mae Home Ready and Freddie Mac requirements, which is a conforming loan. Neither company will buy the loans if they do not fit their loan limits and other requirements.
Lenders may want you to apply for a Fannie Mae Home Ready-compliant loan because they have a greater chance of liquifying the asset. With liquidity, banks can create more loans and collect more fees.
But conforming loans also have benefits for the borrower, especially if you have a low income. Fannie Mae mortgage rates and insurance requirements are usually lower than conventional loans.
Plus, Freddie Mac mortgage rates are comparable to Fannie Mae’s. For the Freddie Mac pre approval, you can have a co-signer who will not use the home as their primary residence.
General requirements for mortgages can include the following:
Credit score of at least 620
Monthly debt-to-income less than 50 percent
Down payment between 3 and 5 percent for a single-family home
“Reserves” savings between two to six months’ worth of mortgage payments
You can apply for a Fannie Mae Home Ready mortgage if you are a first-time or subsequent homebuyer. You cannot make more than 80 percent of the median income, as the program is intended for low- to moderate-income borrowers. However, it is also a Fannie Mae first time home buyer loan, so you may still qualify with a higher income if it is your first home.
Freddie Mac Home Possible loans have the same income limit. You can finance up to 97 percent of the purchase price, so you may only need to pay 3 percent toward the down payment. You must generally have a credit score of at least 660 and a debt-to-income ratio of less than 43 percent.
The Fannie Mae HomePath program deals with mortgages for foreclosed properties. The homes are “as is,” but you might be able to get closing cost assistance of up to 3 percent of the purchase price. The down payment requirement is 3 percent, and you must pay for and complete the HomePath Ready Buyer Program.
You can apply for Fannie Mae HomeStyle loan if you need money to renovate your new home. Homestyle Mortgage lenders can also bundle it with other mortgage products. An approved contractor works with you to submit renovation plans for an appraiser to review and determine the value.
If the idea of saving up for a down payment while paying rent sounds impossible, then your first step toward homeownership could be a rent-to-own opportunity.