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Fannie Mae: What You Need To Know
The Federal National Mortgage Association (FNMA), frequently referred to as Fannie Mae, was created in 1938 to provide support and stability to the housing market during a difficult financial time. It provided a long-term, predictable mortgage with low interest rates. This helped make purchasing a home possible for first-time home buyers and moderate-income households across the U.S. Currently, home buyers can purchase various types of homes with a loan backed by Fannie Mae. Home buyers can find affordable housing from apartments and condos to single-family homes.
You will need to meet income eligibility requirements if you are looking to purchase your dream home with a mortgage loan backed by the FNMA. Due to the program backing millions of home loans, borrowers should not be seen as high risk and lending companies must adhere to a strict selling guide. The process of applying for a loan should be fairly simple if you meet these qualifications. Read the following sections below to learn more about Fannie Mae and the application process.
Understanding Fannie Mae
Before Fannie Mae, home buyers would finance their homes with private companies. It was not until the Great Depression of the 1920s that people began to recognize the need for a reliable and durable source of funding in the housing market. From what had started as the stock market crash in 1929, ended with millions of foreclosed homes across the country. Thus, the FNMA was established to provide liquidity and stability to the housing market by establishing a secondary mortgage market that would take mortgage loans off the books of banks and lending companies and sell them to investors.
Fannie Mae is a Government-Sponsored Enterprise (GSE), a privately held financial services corporation chartered and supported by the federal government. Before it existed, home loans were typically short-lived, renewable loans with large balloon payments and high down payments, making it difficult for the average American to purchase a home. Fannie Mae introduced a new type of loan that made the dream of owning a home obtainable: the 30-year, fixed-rate mortgage loan. Home buyers could now have a predictable and stable mortgage payment. Not only has the enterprise expanded the housing market, but it remains one of the leading sources of financing for mortgage lenders today.
Fannie Mae: How It Works
Not to be confused with a primary lender, Fannie Mae guarantees, holds and sells home loans from lending companies to increase the liquid cash available to produce more mortgages. Lending companies can continue to distribute loans to qualifying home buyers while remaining financially stable this way.
If a lending company keeps granting long-term loans to home buyers, it could take 30 years (for a conventional loan) before its funds are replenished. Insufficient capital can make it difficult and nearly impossible for lending companies to continue to distribute loans.
FNMA makes future lending possible by purchasing these loans immediately and removing them from their books. More specifically, the enterprise will purchase a mortgage, hold it or bundle it up with other mortgages and sell it in the form of mortgage-backed securities (MBS). These MBSs are purchased by a pool of big time investors, such as investment banks and insurance companies, who accrue profit by the interest-rates of borrowers.
Fannie Mae guarantees that investors will receive their principal and interest-rate payments whether or not borrowers meet their mortgage payments. Because of this, it only purchases conventional or conforming loans that meet strict origination and underwriting guidelines. These loans typically have low interest-rates and do not exceed the maximum loan limit set for the year.
Obtaining a mortgage loan from a Fannie Mae approved-lender ensures that the lending company creates high-quality loans for its borrowers and has not participated in any unethical lending practices. So, while lending companies serve as the middle man between Fannie Mae and borrowers, the FNMA is the middle man between lending companies and investors.
Fannie Mae Requirements
Home buyers and approved Fannie Mae lenders must meet strict eligibility requirements to qualify for a mortgage loan backed by them. In addition, all loans backed by Fannie Mae must be conforming or conventional loans. Home buyers must meet income requirements and loans originated must not exceed maximum loan limits based on local markets. This mainly prevents the distribution of subprime or high-risk loans and unethical lending practices.
To determine whether you are capable of paying your monthly mortgage payments on time, your income, debt and financial obligations will be considered. These expenses may include credit card payments, student loans and auto loan payments. According to the Fannie Mae selling guide, your debt-to-income ratio must be 50 percent or lower.
In addition, you generally must have a credit score of at least 620 to qualify for a fixed-rate mortgage or a 640 to qualify for an adjustable-rate mortgage. Your underwriter will take three different FICO scores and eliminate the highest and lowest score while considering the remaining score. Along with this score, they will take into account your loan-to-value ratio to determine your proposed mortgage as a percentage of your home’s value. Fannie Mae lenders will prefer lower percentages because they present a lower risk. Lastly, it's critical to keep in mind that a lending company may have its own eligibility requirements in addition to those imposed by Fannie Mae.
Applying for a Fannie Mae Loan
To apply for a Fannie Mae-backed mortgage loan you will find a lending company approved by the FNMA. Lenders may include banks, credit unions and small lending companies. Once you've found the right lender, you'll need to complete a preliminary review process. Here, a skilled underwriter will sit down with you to go over your finances and the type of loan you'll be able to get as far as down payment, monthly mortgage payments and interest rate.
Next, you should go over the pros and cons of a fixed-rate versus adjustable-rate mortgage so you can choose which one is the best fit for you. When the underwriter has determined whether you qualify, you will both submit a Fannie Mae loan application. You'll need to provide financial information and documentation, such as proof of employment, gross income and monthly obligations.
These financial obligations typically include alimony, credit card payments, car payments and child support. Sometimes you'll receive approval right away and in same cases it can take some time, depending on whether your lending company has an additional underwriting process.