Are you finally at a place in your life where you want to buy your first home? Not sure where to start or if you can even qualify? If you’ve looked into traditional mortgage loans you’ve probably found that qualifying for a mortgage loan is more difficult than you thought.
The cost of housing continues to increase and it has become harder and harder for the average American to afford a traditional home loan. That is why Fannie Mae and Freddie Mac were first created.
But you’re probably asking, “What are Fannie Mae and Freddie Mac and how do they help me?”
What are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are how the government has helped to level the playing field when it comes to mortgages.
It is important to understand that Fannie Mae and Freddie Mac aren’t themselves mortgage lenders. They are government-backed mortgage companies but they do not themselves lend out money for home mortgages.
Instead, these government-sponsored entities buy mortgages from the banks and turn them into mortgage-backed securities. Then they sell them on the secondary mortgage market to investors.
You might be thinking, “Okay, but what does that have to do with me?”
To better understand how Fannie Mae and Freddie Mac work and how that helps people today we first need to talk about where they came from.
Fannie Mae and the Great Depression
So Fannie Mae was first created by Congress back in 1938 as a way to help stabilize the housing market during the Great Depression.
And it wasn’t even called Fannie Mae. Its real name is the Federal National Mortgage Association. But Fannie Mae has a nicer ring to it so the nickname stuck.
Fannie Mae is actually what helped to create the long-term fixed-rate loan. Before Fannie Mae mortgage loans required incredibly large down payments and only lasted about 5 – 10 years.
But because of the Great Depression, most Americans couldn’t afford those types of payments. And that is when Fannie Mae came in to help the housing market.
How Does Fannie Mae and Freddie Mac Benefit Me?
With the housing market continuing to grow more and more every year many Americans can’t afford a standard home loan from a mortgage lender. Fannie Mae and Freddie Mac act as a buffer between the bank and the homeowner.
So in instances where you would typically be denied by a mortgage lender Fannie Mae comes in and backs the mortgage and takes on the financial risk. This helps the mortgage lender to provide more homeowners with a mortgage loan.
So if you don’t qualify for a conventional home loan, looking into a government-backed home loan might be the best option for you.
How are Fannie Mae and Freddie Mac Different?
Freddie Mac is very similar to Fannie Mae in a lot of ways. They are both government-backed, they both work in the secondary mortgage market, and they both purchase mortgaged and turn them into mortgage-backed securities.
So what is the difference?
The biggest difference between the two is the mortgages. Fannie Mae works typically with larger banks and mortgage lenders while Freddie Mac concentrates on smaller banks like thrifts.
There are also some different loan programs that Fannie Mae and Freddie Mac offer that differ from one another.
But most of their conventional loan requirements are pretty much the same.
The requirements necessary for qualifying for these government-backed home loans are very similar. Both Fannie Mae and Freddie Mac require a specific debt to income (DTI) ratio of as high as 45%.
However, the lower your DTI the lower your down payment typically will be. Your credit score will need to be at least 620 to qualify for a loan as well. And there are some other standard requirements.
But for the most part, Fannie Mae and Freddie Mac are incredibly similar in their design and how they help the American people with affordable home loans.