Fannie Mae is currently one of the largest forces supporting the U.S. mortgage market. Also known as the Federal National Mortgage Association (FNMA), this government sponsored enterprise (GSE) was first acquired by the federal government during the recession of 2008. Its role is to purchase qualifying loans from lenders, and thus absorb some of the financial risk. This then encourages lenders to continue issuing mortgages to the public at affordable rates.
Generally, Fannie Mae mortgage interest rates are lower in comparison to other types of loans, including those backed by the Federal Housing Administration (FHA). However, these home loans can be more difficult to qualify for by comparison. If you plan on buying a home, it is worth taking the time to learn more about this option, including how it operates, the eligibility requirements, finding a lender and the process to apply.
What is a Fannie Mae Mortgage Loan?
Contrary to popular belief, you do not purchase mortgage loans directly from this GSE. Instead, you apply through a lender that is authorized to offer these types of loans. Lenders must follow certain guidelines in order to create and issue such loans, to ensure they conform to the established guidelines. For example, conforming loans do not exceed loan limits.
Rather than guaranteeing them outright, Fannie Mae then buys these loans and bundles them into mortgage-backed securities. These bundles are then sold to investors on a separate market, including investment banks and insurance companies, who are able to guarantee principal payments and interest on behalf of the borrowers.
The creation of this secondary mortgage market allows the housing market to continue operating. This is because smaller banks, credit unions and other lenders are able to retain the liquid assets needed in order to issue more loans. However, to qualify for this type of home loan, you must first meet several eligibility requirements, including those that revolve around your credit score and history, debt to income ratio and down payment availability.
Fannie Mae Home Loan Options
FNMA purchases several different types of mortgage on the housing market. Each type falls into the conventional loan category, since they are not backed by a government entity. These loans will typically cost less than FHA loans throughout the life of a loan, but they can be harder to qualify for. In general, the type of mortgage you apply for depends on your financial circumstances and long-term goals.
This GSE is known as the biggest supporter of the 30-year fixed mortgage rate, meaning that the interest rate you pay remains the same throughout the life of the loan. This is typically the better option if you plan to remain in the home for several years. Alternately, you can opt for an adjustable rate mortgage (ARM), which means the interest rate periodically changes. ARMs typically start with lower rates, so they are beneficial to homeowners that do not plan on owning the home in long-term.
Within these two mortgage loan categories, prospective homeowner’s have the opportunity to choose from several homeownership options, including, but not limited to the:
- HomeReady Mortgage. This type of mortgage is available to applicants with a lower income, credit score and cash flow. Qualified applicants receive an affordable monthly payment with the ability to eventually cancel their mortgage insurance and further lower their payments.
- Standard 97 Percent Loan-to-Value Mortgage. This home loan option features low down payment financing with standard fees for creditworthy first-time homeowners that do not meet the income limit qualifications of a HomeReady Mortgage.
- MH Advantage. MH Advantage offers conventional financing for manufactured homes with features that are similar to site-built homes.
FNMA loans also come with other numerous benefits throughout the life of a mortgage. For example, homeowners may qualify for refinancing options, loan modification programs and forbearance options. These additional benefits can help homeowners avoid foreclosure by reducing payments and, at times, extending the life of a loan.
Fannie Mae Conventional Loan Requirements
According to Fannie Mae guidelines, lenders must follow certain criteria when originating loans for sale on the secondary market. In addition, applicants must also fulfill certain qualifications in order to receive this type of loan. Generally, eligibility requirements cover a number of different topics including, but not limited to:
- Credit score and history.
- Debt to income ratio.
- Requested loan amounts.
- Down payment requirements.
To qualify for a Fannie Mae home loans, you need a fair credit score and history. In general, these credit score requirements are higher than that of FHA loans. However, this also depends on several factors. If you do have a lower credit score, you may still be able to obtain an approval by offering a larger down payment or obtaining a cosigner. There is a minimum down payment requirement as well, which varies depending on the particular type and amount of loan you apply for.
While there are some exceptions, FNMA mortgage loans tend to have strict debt-to-income (DTI) ratios that must be met in order to qualify. Your DTI ratio refers to the amount of income that you have after your monthly expenses, such as car loan payments, credit cards and other debt.
As previously mentioned, lenders must adhere to the Fannie Mae selling guide when originating these types of loans. Most importantly, a mortgage cannot exceed the maximum loan amount, which can vary by state and may change from one year to the next. Therefore, it is important to understand these local limits when choosing a property if you want this type of loan.
How to Find Fannie Mae Lenders
You can submit a Fannie Mae loan application by contacting an approved lender. Today, many mortgage lenders offer this type of loan, so they are widely available through different banks, credit unions and other entities. You can find approved lenders by contacting various local financial institutions in your area and requesting information on these loans. As with any other type of loan, it is best to review several different local lenders that offer these mortgages, as rates and costs can vary from one lender to the next.