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Fannie Mae and Freddie Mac: What You Should Know

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Fannie Mae and Freddie Mac help fuel the U.S. mortgage lending industry, providing cash to lenders to fund mortgages to consumers at affordable rates. They are both private companies, but their operations and objectives are sanctioned by the government, which makes them “government-sponsored enterprises” (GSEs).

Fannie Mae and Freddie Mac set the guidelines for most conventional loan products and operate under the oversight of the Federal Housing Finance Agency (FHFA). However, the requirements and programs offered vary between the two GSEs, and understanding these differences may help you determine which agency’s products better fit your mortgage financing needs.

What is Fannie Mae?

Fannie Mae is a nickname for the Federal National Mortgage Association (FNMA), a leading source of home financing for lenders and banks nationwide. Although Fannie Mae doesn’t actually lend money, it buys and sells mortgages from lenders, which allows them to offer low-down-payment loans with up to 30-year repayment terms.

Its signature programs include the HomeReady® loan, a low-down-payment, first-time homebuyer program, as well as the HomeStyle® Renovation loan, for borrowers seeking fixer-upper loans. Fannie Mae also offers specialized programs, such as the MH Advantage® program for consumers that need home loans for manufactured homes.

The history of Fannie Mae

Before Fannie Mae was created in 1938, home loans had to be repaid quickly and often included a “balloon payment,” meaning the entire balance was due and payable after a set time period. During the Great Depression, nearly a quarter of American homeowners lost their homes, leaving banks without enough money to offer mortgages.

Congress created Fannie Mae to address this housing crisis and increase banks’ capacity to lend to consumers. The housing market and economy improved as a result, and mortgage banks created the long-term, fixed-rate loan that is now the mortgage industry standard.

Fannie Mae initially bought and sold loans guaranteed by the government; in 1954 Congress restructured it as a public-private, mixed-ownership corporation. By 1968, it was a completely private company and eventually began buying loans in the secondary market and offering mortgage-backed securities to investors.

What is Freddie Mac?

Freddie Mac is a nickname for the Federal Home Loan Mortgage Corporation (FHLMC), a shareholder-owned company that, like Fannie Mae, doesn’t lend directly to consumers. Freddie Mac offers the Freddie Mac Home Possible® loan, its 3% down first-time homebuyer program, and its own CHOICEHome® mortgage loan option for manufactured homebuyers.

Other programs include the HomeOne℠ Mortgage, a program for first-time buyers with no income limits, and the CHOICERenovation® program, which is similar to the Fannie HomeStyle renovation program.

The history of Freddie Mac

Congress chartered Freddie Mac in 1970 as a private company. As the secondary mortgage market expanded, the government authorized the company to add an additional supply of mortgage financing funds. Freddie Mac became the first GSE to purchase mortgages from lenders, package them and then sell them as mortgage-backed securities to investors.

How Fannie Mae & Freddie Mac help you get a mortgage

Fannie Mae and Freddie Mac help you get a mortgage by providing funds to mortgage lenders and setting guidelines for a wide variety of mortgage loan options, which meet the needs of homebuyers and homeowners. Below is a brief overview of some of the features of Fannie Mae and Freddie Mac home loans loans that make them so popular:

Low-down-payment options. Homebuyers only need a 3% down payment to buy a home, or 3% equity to refinance a home they already own. Homebuyers can keep their cash in the bank, and homeowners can refinance at a lower rate — even if they have very little equity built up.

Fixed-rate mortgage terms as long as 30 years. A longer term with a fixed rate gives homeowners the security of a steady, predictable mortgage payment.

Financing for second homes and investment properties. Most government-backed loans require you to buy a home as your primary residence. Fannie Mae and Freddie Mac provide mortgage programs for homebuyers to purchase and refinance vacation homes and rental properties.

Appraisal waiver eligibility. Borrowers with large down payments and plenty of equity may be eligible for a property inspection waiver, which allows them to avoid the expense and hassle of a home appraisal. Government-backed loan programs don’t offer any appraisal waiver options if you’re buying a home.

Mortgage insurance flexibility. If you make at least a 20% down payment to buy a home, or have 20% equity and are refinancing your home, Fannie Mae and Freddie Mac loans don’t require mortgage insurance, which covers lenders’ losses if you default on a loan.

Higher loan-limits than the FHA loan program. The conforming loan limit for conventional single-family home financing in most parts of the country is capped at $647,200, compared to the $420,680 FHA loan limit for one-unit home loans backed by the Federal Housing Administration (FHA).

How both agencies keep mortgage rates low

Low interest rates. Lenders can offer interest rates that are lower than most other types of debt because they have access to funds from Fannie Mae and Freddie Mac to make loans and sell them in the secondary market. Mortgage companies must follow lending standards set by Fannie Mae and Freddie Mac, which protect homeowners from borrowing money they can’t pay back. If there’s less risk that mortgage loans will default, lenders can offer lower interest rates to current and future homeowners.

Fannie Mae and Freddie Mac loan programs

Below is just a sampling of the programs offered by Fannie Mae and Freddie Mac:

Type of programName of programSpecial features
First-time homebuyerFannie HomeReady3% down payment Boarder income allowed
First-time homebuyerFreddie Mac Home Possible3% down payment Sweat equity allowed
RefinanceCash-out refinanceAllowed on primary, second homes and investment properties
RefinanceRate-and-term refinanceAppraisal waiver possible No mortgage insurance with 20% equity
RenovationHomeStyle (Fannie Mae) Renovation/CHOICERenovation (Freddie Mac)Loan is based on home's after-improved value Can borrow higher loan amounts than FHA renovation loan programs

Similarities between Fannie Mae and Freddie Mac

  • They are both government-sponsored enterprises
  • FHFA oversees them
  • They are responsible for providing liquidity and affordability to the mortgage market
  • They guarantee mortgages financed by private lenders
  • They purchase and sell mortgages in the secondary mortgage market
  • They offer multiple loan programs, including products for first-time and low-income borrowers
  • Neither originates loans

Differences between Fannie Mae and Freddie Mac

  • The government chartered them at different times
  • They both offer a range of programs to similar types of borrowers, but their requirements often vary

How Fannie Mae and Freddie Mac loans compare to government-backed loan programs

Your loan officer may suggest a variety of government-backed loan programs. The FHA backs loans to borrowers with lower credit scores. The U.S. Department of Veterans Affairs (VA) guarantees loans for eligible military borrowers with no down payment and the U.S. Department of Agriculture (USDA) offers low-income borrowers zero-down-payment financing for homes in approved rural areas.

If you’re considering a government-backed loan, here’s a side-by-side comparison of some of the basic loan features to consider:

Loan featureLoan programRequirement
Minimum down paymentFannie Mae & Freddie Mac3%
FHA3.5%
VA0%
USDA0%
Minimum credit scoreFannie Mae & Freddie Mac620
FHA500
VANo guideline minimum
USDANo guideline minimum
DTI RatioFannie Mae & Freddie Mac45% to 50% with exceptions
FHA43% to 50% with exceptions
VA41% but exceptions possible
USDA41% but exceptions possible
Mortgage insurance required?Fannie Mae & Freddie MacRequired with less than a 20% down payment
FHARequired regardless of down payment
VANone required
USDAGuarantee fees required similar to FHA mortgage insurance
Special conditionsFannie Mae & Freddie MacLoan limits for single-family home capped at $647,200
FHAMust have 10% down payment for 500 score
VAMust be an eligible military veteran
USDAMust meet income and rural neighborhood restrictions set by USDA

Fannie and Freddie’s role in the 2007-08 financial crisis

When the financial crisis of 2007-08 hit, both Fannie Mae and Freddie Mac experienced significant losses in both their guarantee business and holdings in the secondary market. Since the two GSEs were responsible for most of the country’s mortgage loans, there was a great deal of concern about the implications that a bankruptcy would have on the market.

In late 2008, the government stepped in and placed both companies in federal conservatorship. Fannie Mae and Freddie Mac remain shareholder-sponsored companies under the oversight of the government.

Frequently asked questions

Where can you find Fannie Mae guidelines?

The Fannie Mae guidelines are spelled out in the company’s eligibility matrix. The document details the borrower requirements for all Fannie Mae loans. Borrowers can check Fannie Mae income limits with the company’s Area Median Income Tool.

Where can you find Freddie Mac Home Possible guidelines?

General Freddie Mac guidelines can be found by searching the Single-Family Seller Servicer Guide. Homebuyers can look up the guidelines for Freddie Mac Home Possible loans using the Home Possible Income and Property Eligibility Tool.

What are the Fannie Mae and Freddie Mac loan limits?

Freddie Mac and Fannie Mae loans adhere to FHFA loan limits. In 2022, the loan limit for most one-unit properties is $647,200. In high-cost areas, that maximum loan amount is $970,800.

Where can you find Freddie Mac mortgage rates?

Freddie Mac publishes U.S. mortgage rates in its Primary Mortgage Market Survey (PMMS). This weekly report averages the interest rates from participating lenders on 30-year fixed, 15-year fixed and 5/1 adjustable-rate mortgages. The survey reflects market trends and not specific Freddie Mac mortgage rates.

How can Fannie Mae help first-time homebuyers?

Two Fannie Mae home loans may meet the needs of first-time buyers — the company’s HomeReady loan and its 97% LTV Standard loan. For either product, at least one borrower must take the Fannie Mae first-time homebuyer education course if all occupying borrowers are first-time buyers.

 

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