What Are Fannie Mae and Freddie Mac?

Whether you're a first-time homebuyer or a longtime homeowner, you have likely heard the names Fannie Mae and Freddie Mac. Although you might work directly with a bank or other lender to obtain a mortgage, your loan may be packaged and sold to Fannie or Freddie.

Here's more about Fannie Mae and Freddie Mac, including their role in the mortgage market and why they matter when you're buying a home.

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What Do Fannie Mae and Freddie Mac Do?

Fannie Mae and Freddie Mac are government-sponsored enterprises, organizations that help bring capital to the U.S. housing market. The names Fannie Mae and Freddie Mac are simply creative takes on the acronyms for these companies, FNMA for the Federal National Mortgage Association and FHLM for the Federal Home Loan Mortgage Corp., respectively.

These federally chartered, privately owned corporations are regulated by the Federal Housing Finance Agency and aim to provide liquidity, stability and affordability to the market in all economic conditions. They accomplish this by purchasing home loans from banks, bundling those loans and then selling them to investors, which enables banks to finance more mortgages.

A loan that meets the requirements to be purchased by Fannie Mae or Freddie Mac may also be called a c onforming loan.

Fannie and Freddie set the standards for the home loans they are willing to buy and guarantee payment of principal and interest to make the loans attractive to investors. Brian Gilpin, senior vice president of capital markets at Embrace Home Loans, compares the Fannie Mae and Freddie Mac guarantee to a Hershey's wrapper on a chocolate bar.

"That brown-and-white wrapper around a chocolate bar symbolizes a certain type of chocolate, flavor and quality, no matter where you find them in the world," Gilpin says. A loan that meets Fannie's or Freddie's requirements "indicates a certain quality of borrower and underwriting standards" that investors can expect, much like the standards of quality consumers might expect from a Hershey's bar.

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Fannie Mae vs. Freddie Mac: How Are They Different?

-- Fannie Mae buys mortgages from larger commercial banks, and Freddie Mac purchases them from smaller banks.

-- Fannie- and Freddie-backed loans have different borrower requirements. You could meet the criteria for one but not the other, or one could be better for you than the other. Though the two use similar underwriting programs, says Sonja Bullard, branch manager of Acopia Home Loans in Forsyth County, Georgia, Freddie's "automated underwriting tends to have more lenient findings than Fannie's."

-- Fannie and Freddie also have their own loan programs with distinct requirements.

-- Fannie Mae and Freddie Mac were established by the U.S. government for different purposes. Fannie was created in 1938 during the Great Depression to provide access to loan funds on reasonable terms after defaults had drained funding for new mortgages. Freddie came in 1970 to expand the nation's secondary mortgage market, where lenders and investors buy and sell mortgages and their servicing rights.

What Are Fannie Mae's and Freddie Mac's Mortgage Programs?

If you are a first-time or repeat buyer with a low or moderate income, you might explore these Fannie Mae and Freddie Mac mortgage programs available through approved lenders.

Fannie Mae Programs

HomeReady: This mortgage can be used to purchase or refinance a home and is geared toward low-income first-time or repeat buyers with limited cash for a down payment. You can access a mortgage with a 3% down payment, and cash for the down payment can come from gifts and grants, with no minimum personal contribution.

Buyers will need a credit score of at least 620 to qualify but can get better pricing with a score of 680 or better. Also, private mortgage insurance is required until the borrower's equity in the home reaches 20%.

HomeStyle Renovation: This loan allows buyers to include money for renovations and repairs when they purchase or refinance homes. Borrowers can obtain up to 75% of the purchase price, plus renovation costs, or the "as completed" appraised value, whichever is less.

HomeStyle Renovation can be combined with HomeReady or HomeStyle Energy if you're planning energy- or water-efficiency upgrades.

HomeStyle Energy: You can borrow up to 15% of your home's appraised value with improvements for purchases such as solar panels, upgraded water heaters and energy-saving windows. This loan can also be used to finance features that can improve your home's resiliency to natural disasters, such as storm-surge barriers, retaining walls and foundation retrofitting for earthquakes. HomeStyle Energy can be combined with HomeStyle Renovation or HomeReady.

Freddie Mac Programs

HomeOne:First-time buyers and borrowers who need a rate-and-term refinance with a low down payment may explore the HomeOne mortgage. You can make a down payment of just 3%, and mortgage insurance can be canceled once home equity reaches 20%. Single-family homes, townhomes and condominiums can be purchased through the HomeOne mortgage program, but not manufactured homes.

Home Possible: This loan program could be a match if you want to own a home but earn a low income. You could qualify if your income does not exceed 80% of area median income, and your down payment may be as little as 3% and come from a variety of sources, including family members. Borrowers can cancel mortgage insurance after reaching 20% home equity.

CHOICERenovation: This program offers borrowers savings and convenience by financing their home purchase and renovation costs in a single closing transaction. If you are refinancing, you can borrow up to 75% of the as-completed appraised value of the improvements. If you are buying a home, you can get up to 75% of the purchase price and the renovation costs, or the as-completed appraised value of the improvements, whichever is less.

For a manufactured home, the ceiling on renovation costs is $50,000 or 50% of the as-completed appraised value of the improvements, whichever is less.

Who Qualifies for a Loan From Fannie Mae or Freddie Mac?

These are general guidelines for Fannie or Freddie mortgage approval.

Credit score: Fannie Mae requires a FICO credit score of at least 620 for fixed-rate mortgages and at least 640 for adjustable-rate mortgages. Freddie Mac asks for a minimum credit score of 620.

Down payment: You will need a down payment of at least 3%.

Cash reserves: Requirements vary based on the type of loan, but you may need enough cash in your bank account to cover your mortgage for two to six months.

Debt-to-income ratio: Fannie and Freddie permit a DTI -- the percentage of your monthly income that goes toward paying debts -- of up to 36%. Both may allow up to 45%, but acceptable justifications differ slightly.

Fannie will expect borrowers to meet credit and cash reserve requirements, and Freddie will evaluate credit history, additional income, prospective earnings and other factors.

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How Can Fannie or Freddie Help if You Can't Pay Your Loan During the Pandemic?

If Fannie Mae or Freddie Mac owns your loan, you may be able to temporarily pause or reduce your monthly payments if you are struggling to make them because of the pandemic. You can use online tools to see whether Fannie Mae or Freddie Mac owns your mortgage.

Borrowers with Fannie- or Freddie-backed loans do not currently have a deadline for requesting an initial forbearance. You will typically receive a forbearance plan of three to six months, and you can request an extension if you need more financial recovery time.

Most loans can receive up to 12 months of forbearance. Some loans get up to 18 months, but borrowers must have been in a forbearance plan by Feb. 28, 2021, to be eligible.

Fannie and Freddie will waive late fees and penalties, and loan servicers should not report late payments during a COVID-19 forbearance because no payments are due. The three major credit bureaus allow you to check each report weekly for free through April 2022 at AnnualCreditReport.com.

About a month before your forbearance plan is scheduled to end, your loan servicer will contact you to discuss your financial circumstances and repayment options. Remember, you don't have to pay back the entire amount at once unless you can afford to do so.

Your choices might include:

-- A repayment plan. You will spread out your past-due amount and pay it over a number of months, along with your regular mortgage payments, to bring your account current.

-- A COVID-19 payment deferral. If you cannot afford a repayment plan, you can delay repayment and will not be charged interest on forbearance amounts. You will pay when the loan matures or sooner if you sell or transfer the property, refinance the mortgage or pay off the interest-bearing principal balance.

-- A loan modification.You may work with a lender to change the terms of your loan, which can make your payments or terms more manageable and reduce your monthly payment. Whether the interest rate or the repayment period changes, the borrower completes a trial period to ensure that payments are affordable and can be completed on time.

-- A refinancing option. Ask your servicer to make sure your loan is eligible for refinancing. Your servicer can discuss refinancing options, including interest rates.

If you need further support and your loan is owned by Fannie Mae, you can access Department of Housing and Urban Development-approved counselors through Fannie's Mortgage Help Network. Freddie Mac offers additional help through its network of Borrower Support Centers, which can assist you by phone or online.