What are they?
Fannie Mae and Freddie Mac are quazi-government owned entities that play a huge role in the mortgage industry. They both buy mortgages from lenders and then group them together to sell to investors.
Fannie Mae stands for FNMA, Federal National Mortgage Association, and was created in 1938 as a public entity to help the flow of capitol in the housing market. Fannie Mae was only allowed to purchase government-insured mortgages, otherwise known as FHA loans. Freddie Mac got its name from FHLMC, Federal Home Loan Mortgage Corporation, and was established in 1970. At this time, Fannie Mae was now allowed to buy private mortgages not insured by the government which is why Freddie Mac was created – to install competition in the secondary mortgage market.
What do they do?
Let’s start from the beginning. Banks lend money to those who are ready to purchase a home. Whether they are in Charlotte, Raleigh or even in San Fransisco, borrowers need loans, aka mortgages, so they will be able to buy the property. With masses needing these loans for a long duration of time before the entirety of the loan is repaid, the possibility of the banks running out money to loan is higher than not.
This is when Fannie Mae and Freddie Mac get their capes to save the day. Essentially, they buy mortgage loans from banks because they work with lenders not borrowers. This allows the banks to obtain the necessary capitol needed to lend again. Generally, Fannie Mae buys mortgages from private commercial banks, while Freddie Mac buys from smaller “thrift” banks.
Fannie and Freddie guarantee the loans that are bundled into the mortgage-backed securities they sell to investors. If the borrower defaults on the mortgage, Fannie or Freddie will pay back the investor, not the borrower. For Fannie and Freddie establish such a guarantee, they require the originating banks to review the creditworthiness of the borrower: documented proof of income, documented appraisal of the home by a professional and neutral third party, etc.
Fannie Mae HomeReady
- Have low to moderate income
- Are first-time or repeat home buyers
- Have limited cash for down payment
- Have a credit score ≥ 620; borrowers with credit scores ≥ 680 may get even better pricing
- Have supplemental boarder or rental income
| Benefits | HomeReady | FHA |
| Required down payment | 3% | 3.5% |
| Cancellable mortgage insurance* | Yes | No |
| Immediate appraisal orders from lenders | Yes | No |
| Free from geographic restrictions on loan amounts | Yes | No |
Freddie Mac HomePossible
Home Possible mortgages offer low down payments for low to moderate income home buyers or buyers in high-cost or under-served communities.
Low down-payment
The Home Possible Mortgage Program enables you to buy a home with a down payment as low as 3% of the property purchase price. By providing the opportunity to buy a home with little down payment, this program makes owning a home more affordable.
Potentially lower mortgage rate
The Home Possible program offers lower interest rates for borrowers that meet certain criteria or for properties located in designated areas. The lower interest rates apply to borrowers with incomes that are less than 80% of the area median income or if the home is located in a government-designated low income census tract.
Ability to Use Alternate Income Sources to Qualify for Mortgage
The Home Possible program enables applicants to use alternate sources of income to qualify for a mortgage. When you apply for a mortgage typically only the borrower’s income is used to qualify for the loan, but with the Home Possible program, additional sources of income can be included in your application. With a Home Possible mortgage rental income is also factored into the qualification decision.
Reduced Monthly PMI Cost
The ongoing monthly private mortgage insurance cost for a Home Possible mortgage may be lower than the monthly PMI fee for a standard mortgage or the mortgage insurance premium for an FHA loan, depending on your credit score and loan-to-value ratio. Additionally, monthly PMI for a Home Possible mortgage is removed when your LTV ratio falls below 78% as your property value increases or your mortgage balance decreases whereas borrowers are required to pay monthly FHA mortgage insurance over the length of their loan
Potentially Higher Borrower Income Limit
Depending on where the home you are buying is located, Home Possible program applicants may be subject to income limits. Home Possible income limits, however, may be higher than the limits for other low down payment mortgage programs such as the HomeReady mortgage program. For properties located in designated low income census tracts there is no borrower income limit which means all borrowers are eligible to use the Home Possible program to buy properties in those areas. Areas are designated as low income census tracts according to Freddie Mac policies.
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