304 North Cardinal St.
Dorchester Center, MA 02124
304 North Cardinal St.
Dorchester Center, MA 02124
Fannie Mae, or Federal National Mortgage Association, is a government-sponsored entity that is crucial to the nation’s housing market. It purchases and guarantees mortgages on the secondary mortgage market. If you had a loan recently, you might receive a mail from Fannie Mae stating they purchased your loan. But do they sell mortgages?
Fannie Mae does not sell mortgages but purchases them from lenders. Fannie Mae also doesn’t provide loans to borrowers but purchases their loans from their lenders.
This is a way to provide liquidity and stability to the housing market and allows lenders to get rid of the debt and continue to provide loans to other borrowers.
Let’s start by explaining what Fannie Mae is. Fannie Mae was established by the federal government in 1938 to help the housing market after the great depression. In 1968, Fannie Mae was sold to private shareholders. However, the company was again placed in conservatorship by the federal government in 2008, after a mortgage meltdown.
Fannie Mae is a massive player in the mortgage process, and its impact is huge on the mortgage market. You can not apply for a mortgage at Fannie Mae, but you can end up paying them if your mortgage lien is transferred to Fannie Mae.
Fannie Mae buys mortgage loans from lenders and banks. These loans are then repacked into mortgage-backed securities (MBS) and sold on the secondary mortgage market. This gives liquidity to the lenders and allows them to borrow more money. They can purchase your HELOC mortgage, conventional loan, and reverse mortgages. But if you have an FHA loan, this loan will not be available for Fannie Mae. However, before Fannie Mae purchases a loan and makes it into a bond, a loan must meet certain criteria.
A conforming mortgage is a loan that fits Fannie Mae’s guidelines. These guidelines state that the loan conforms if it is a conventional loan – not backed or issued by the government. Fannie Mae guidelines are important in the mortgage loan because if you don’t fit these guidelines, you will hardly be approved for a loan. Here are the criteria a loan must meet:
So, just like you want to know how brokers make money, you probably wonder how Fannie Mae gets profit. Well, as we have already explained, they first turn loans into securities, and then they sell these securities to institutional and individual investors, such as pension funds, endowment funds, and hedge funds, for a profit. They also receive guarantee fees for taking the lending risk from lenders.
Even though Fannie Mae is happy to buy mortgage loans, they are not willing to buy loans that are not safe investments. Once Fannie Mae purchases your mortgage, no terms or conditions will change. But it can impact your mortgage while applying for it because if you don’t meet their criteria the lender may refuse to give you the loan. If your loan is bought by Fannie Mae, you will receive a notice letter from them or your old lender. To be precise, Fannie Mae will buy a loan and not servicing rights, meaning you will continue to make monthly payments to your servicing company.
If you heard about Fannie Mae, you probably have also heard about Freddie Mac. A Freddie Mac (or Federal Home Mortgage Corporation) is also a government-sponsored entity. Freddie Mac also purchases loans on a secondary mortgage market but from smaller lenders and banks.
Freddie Mac offers Home Possible Program for borrowers who live in the home and don’t earn more than the area’s average income. In essence, both entities are here to keep the mortgage market going, allowing lenders to borrow more money.
You probably also heard about FHA, VA, and USDA loans, government-issued and backed loans. And even though Fannie Mae doesn’t work with borrowers, they do offer some mortgage programs like Fannie HomeReady for first-time home buyers. Here are the main differences between Fannie Mae and FHA loans.
|Fannie Mae||More than 3% down payment, min credit score 620, DTI Ratio 45% to 50%. Mortgage insurance is required.|
|FHA||3.5% down payment, Credit score 620, DTI 43%, insurance is required regardless of down payment.|
|No down payment or credit score requirements, DTI 41%, no insurance requirements.|
|USDA||No down payment, or credit score requirements, DTI ratio 41%.|
Well, for starters, this company is a government-sponsored entity that takes off the lending risk from lenders. But it also helps banks and lenders to issue more loans which means more borrowers will be able to buy homes. This process directly affects mortgage rates – the more loans are issued, the lower the rates. Just like the prices of the homes will be lower as well.
Another thing Fannie Mae does is to give guidelines to the lenders so the loans that are issued must be a safe investment and ethically backed. In other words, lenders are those who guarantee that the money is borrowed to the person who will return the loan.
If you receive a letter that tells you Fannie Mae has bought your loan, you shouldn’t be concerned, but if you have any questions, you can contact your servicing company and ask them.