Whether you’re in the market to buy a home, refinance a house or you just follow the news, you’ve probably heard of Fannie Mae, otherwise known as the Federal National Mortgage Association (FNMA). You may even be aware that Fannie Mae plays a significant role in the housing market, even if you’re not fully familiar with how it works.
When choosing a mortgage, Fannie Mae is just one provider that may be available to you. Still, understanding how investors like Fannie Mae work will give you a better understanding of the housing market and the overall process associated with getting a mortgage.
Fannie Mae is a government-sponsored enterprise (GSE) that purchases mortgage loans from commercial banks and other lenders and guarantees, or backs, these loans on the mortgage market. The mortgages are sold as mortgage-backed securities to investors, providing the necessary liquidity in the mortgage markets to make more loans and keep housing affordable.
According to its website, Fannie Mae’s mission is to “facilitate equitable and sustainable access to homeownership and quality, affordable rental housing across America.” There are three key ways in which Fannie Mae works to achieve its goals, which include:
The Federal National Mortgage Association (FNMA) was founded in 1938 by Congress as a GSE in order to provide affordable housing. Prior to that, getting a mortgage required a down payment that could be 50% or more. There were also very strict terms which often enabled the lender to take your home back if you had even one missed payment.
Since its founding, Fannie Mae has seen growth as well as its fair share of bumps. In 1968, Fannie Mae went private after a round of investment by shareholders that was chartered by Congress. Its funding came completely from the stock and bond markets. However, in the late 2000s, Fannie Mae was hit hard by the economic downturn and subsequent troubles in the real estate market.
Fannie Mae has been under the government conservatorship of the Federal Housing Finance Agency (FHFA) since late 2008. It was delisted from the New York and Chicago stock exchanges in mid-2010. Under the agreement, the FHFA financially supports Fannie Mae in certain circumstances in exchange for preferred stock.
Because Fannie Mae doesn’t originate loans, you can’t get your mortgage directly from this GSE. Banks and non-bank lenders like Rocket Mortgage ® are responsible for collecting a client’s application, underwriting the loan – by verifying income, assets and property value – and getting them to the closing table. Once the loan closes, Fannie Mae buys loans that meet its requirements from lenders.
The FHFA sets requirements for Fannie Mae called conforming loan limits. These mortgage loans, known as conforming mortgages, are guaranteed by Fannie Mae. This means they’ll make investors whole if the borrower goes into default. Fannie Mae packages these loans into mortgage-backed securities (MBS) before selling them on the open bond market to investors.
An MBS might consist of 1,000 loans or more that have similar characteristics. Fannie Mae has certain rules, among them that they won’t buy non-conforming loans. Many components can make a loan nonconforming, but one of the most common characteristics is jumbo loan status, which for 2024 is any loan above $766,550 for single-unit properties in non-high-cost areas, such as locations outside of Alaska, Guam, Hawaii and the U.S. Virgin Islands.
You should always feel free to speak with a Home Loan Expert about your situation, but the following is a short list of general guidelines for Fannie Mae loan approval:
Your credit score plays a role in the loan approval process. With loans from either Fannie Mae or its competitor Freddie Mac, you’ll need a qualifying FICO ® Score of at least 620. If you're an individual borrower, your qualifying score is the median between the three major credit bureaus – Experian™, Equifax ® and TransUnion ® . Something that's unique to Fannie Mae loans is that if there are two or more borrowers on the loan, the average of the median credit scores becomes your qualifying credit score for the purposes of getting a mortgage.
Your debt-to-income ratio (DTI), which compares your monthly debt payments to your before-tax monthly income, should be no higher than 50% in most cases to qualify for a Fannie Mae loan. This may need to be lower depending on your situation.
For second homes and investment properties, the down payment requirements are higher, but for a single-unit primary residence, the down payment needed could be anywhere from 3% – 6%.
Reserves represent the number of mortgage payments lenders want to see in your account in case you experience a loss of income or other financial hardship. Your reserves could be up to 6 months with a Fannie Mae loan, although 2 months is generally a good starting point.
Reserves are not generally required for a primary residence – only second homes and investment properties unless there are other risks in the profile.