What is the difference between Fannie Mae and Freddie Mac? -CNBC | Hot Mobile Press

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If you’re learning more about mortgages or have recently started exploring your options for an upcoming home purchase, chances are you’ve come across the names Fannie Mae and Freddie Mac.

While not knowing too much about these two entities won’t stop you from buying a home, it’s always helpful to have some more background, especially when it comes to their roles and functions in relation to mortgages and the home buying process goes.

Below, Select breaks down what you need to know about Fannie Mae and Freddie Mac, and takes a closer look at some of the loan products they offer.

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What exactly are Fannie Mae and Freddie Mac?

Both Fannie Mae and Freddie Mac are companies that buy mortgages from banks — by doing so, they essentially help the banks generate more cash flow so they can continue to originate and process home loans for ordinary people. Each company then either keeps those mortgages as part of its own portfolio or packages them into mortgage-backed securities.

Fannie Mae is actually the nickname for the Federal National Mortgage Association while Freddie Mac is the nickname for the Federal Home Loan Mortgage Corporation.

The first entity, Fannie Mae, was created by the US Congress in 1938 at a time when there was a shortage of affordable housing due to the Great Depression that was taking place in the US in 1929-1939. Term, fixed-rate mortgage, a mortgage that remains popular to this day.

More than 30 years later, Freddie Mac was founded in 1970 to expand the secondary mortgage market – a market where lenders and investors buy and sell home loans – and to mitigate some of the interest rate risk for banks.

How are Fannie Mae and Freddie Mac different?

While Fannie Mae was created before Freddie Mac, the differences don’t stop there. The two companies each buy their loans from different sources — Fannie Mae buys them from big banks and credit unions, while Freddie Mac buys them from smaller banks and credit unions.

Both companies buy and sell conventional loans. And while Fannie Mae and Freddie Mac are each backed by the federal government, the loans themselves are not. The classic loans are secured by private lenders. So you wouldn’t apply for a mortgage directly with Fannie Mae or Freddie Mac, but the mortgage you get can be purchased from either company.

The loans can also be compliant or non-compliant, meaning they would meet or hold correspond to to Fannie Mae and Freddie Mac funding criteria and would not exceed a certain amount that changes each year — for 2022 the limit is $647,200, unless you live in a higher-cost-of-living state that says otherwise is specified. However, jumbo loans are an example of a non-compliant loan that can borrow more money than the above limit.

In terms of loan programs, Fannie Mae offers the HomeReady® Mortgage, which caters to low- to middle-income homebuyers and allows them to pay down as little as 3%. However, certain rules apply: Applicants must have a debt-to-income ratio of no more than 50% and their income must not exceed 80% of the region’s median income.

Because you cannot obtain a HomeReady® Mortgage directly from Fannie Mae, you must apply through a lender such as a bank or credit union. Ally Bank is one such lender that offers this loan.

Allied Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed rate and adjustable rate mortgages included

  • types of loans

    Conventional Loans, HomeReady Loans, and Jumbo Loans

  • conditions

  • credit needed

  • minimum deposit

    3% if proceeding with a HomeReady Loan

advantages

  • The Ally HomeReady loan allows for a slightly lower 3% down payment
  • Pre-approval in just three minutes
  • Application submission in just 15 minutes
  • Online support available
  • Existing Ally customers can receive a discount applied to the closing cost
  • Does not charge lender fees

Disadvantages

  • Does not offer FHA loans, USDA loans, VA loans, or HELOCs
  • Mortgage loans are not available in Hawaii, Nevada, New Hampshire, or New York

Freddie Mac, on the other hand, offers the Home Possible® Mortgage, which typically requires a 3% minimum down payment. Note that qualified applicants for this particular loan program cannot earn more than the median income in their area.

It’s worth noting that while the 3% minimum down payment is still slightly lower than the 3.5% minimum requirement you would need for an FHA loan, if an FHA loan better suits your financial circumstances, you should Consider opting for an FHA loan from lenders like Rocket Mortgage and Chase Bank that offer this option.

rocket mortgage

  • Annual Percentage Rate (APR)

    Apply online for personalized rates

  • types of loans

    Conventional Loans, FHA Loans, VA Loans, and Jumbo Loans

  • conditions

    8 – 29 years, including terms of 15 and 30 years

  • credit needed

    Typically requires a credit score of 620, but will consider applicants with a credit score of 580 as long as other eligibility criteria are met

  • minimum deposit

    3.5% if proceeding with an FHA loan

advantages

  • May use the loan to purchase or refinance a single family home, second home, or investment property or condo
  • Can be pre-qualified in minutes
  • Rocket Mortgage App for easy access to your account

Disadvantages

  • Performs a tough request to provide a personalized interest rate, which means your credit score may suffer a little damage
  • Does not offer USDA loans, HELOCs, home loans or RV mortgages
  • Does not manage jumbo loan accounts after closing

Chase Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed rate and adjustable rate mortgages included

  • types of loans

    Conventional Loans, FHA Loans, VA Loans, DreaMaker℠ Loans, and Jumbo Loans

  • conditions

  • credit required

  • minimum deposit

    3% if you proceed with a DreaMaker℠ loan

advantages

  • The Chase DreaMaker℠ loan allows for a slightly lower 3% down payment
  • Discounts for existing customers
  • Online support available
  • A range of resources for first time home buyers including mortgage calculators, affordability calculators, educational courses and home guides

Disadvantages

  • Does not offer USDA loans or HELOCs
  • Existing customer discounts apply to those who have large balances in their deposit and investment accounts with Chase

Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.

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