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Understanding Fannie Mae Guidelines

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If you’ve been approved for a conventional mortgage, chances are the lender followed Fannie Mae guidelines to help make its final decision. Fannie Mae is a government-sponsored enterprise that fuels the U.S. mortgage market by buying and selling home loans on the secondary market.

Understanding Fannie Mae guidelines and how they shape conventional loan requirements will help you decide if conventional financing is right for you.

What is Fannie Mae?

Fannie Mae is short for the Federal National Mortgage Association, one of two government-sponsored enterprises (GSE) that provides lenders with the cash needed to fund home loans with affordable mortgage rates. In turn, lenders use the cash raised selling mortgages to Fannie Mae to fund new loans, which adds stability to the U.S. mortgage market. Fannie Mae sets the rules lenders follow when underwriting conventional loans, which are any mortgages that are not backed by the federal government.

Until Fannie Mae’s creation, home loans had short repayment terms, such as five years, with large balloon payments due at the end of the term. Nearly a quarter of U.S. homeowners lost their homes to foreclosure during the Great Depression, and banks weren’t willing to fund new mortgage loans. The government created Fannie Mae to provide the financial security for lenders to offer a new type of mortgage — the long-term, fixed-rate loan — aimed at making homeownership more affordable.

Fannie Mae guidelines for conventional mortgages

Here’s a quick look highlighting some key Fannie Mae guidelines for conventional loans.

Fannie Mae guideline typeMinimum requirement
Down payment percentage3% of loan amount for primary residence
Credit score620
Total debt-to-income ratio45% maximum with exceptions up to 50%
Cash reservesUp to six months
IncomeTwo-year history of stable employment with exceptions possible
Loan limits$647,200 for single-family home in most parts of the country
Home valueA home appraisal is typically required
Appraisal waivers may be granted in some cases
TitleTitle must be free of ownership claims
Title insurance is required on all Fannie Mae loans
Property typesSingle-family homes, one- to four-unit homes, manufactured homes, condominiums, co-ops and planned unit developments (PUDs)
Occupancy typesOwner-occupied
Second/vacation homes
Investment properties
Mortgage insuranceUsually required with less than 20% down payment

What you need to know about Fannie Mae guidelines

Down payment. Fannie Mae’s HomeReady® and standard loan programs require only a 3% down payment for a single-family home, as long as it’s a primary residence. The programs allow gift funds from family members if you don’t have the money saved up.

Credit score. 620 is the minimum credit score for a conventional mortgage, but you’ll qualify for better mortgage rates and lower private mortgage insurance premiums with a score of 680 or higher. Check with your lender if you’re financing an investment or multifamily home — the rates are higher.

Credit history. You’ll need to wait up to seven years after a foreclosure to take out a conventional loan.  A Chapter 7 bankruptcy will require a four-year wait before you can qualify. You may want to consider an FHA loan if you want to buy a home sooner: The waiting period is only two years after a Chapter 7 bankruptcy and three years after a foreclosure.

Debt-to-income (DTI) ratio. Your DTI ratio is calculated by dividing your total monthly recurring debt (including your new mortgage payment) by your gross monthly income and multiplying the result by 100 to get a percentage. Although 45% is the standard maximum, lenders may accept a DTI ratio up to 50% if you have higher credit scores and ample mortgage reserves.

Cash reserves. Also called mortgage reserves, conventional lenders may want you to document that you have up to six months of mortgage payments set aside to pay your mortgage if you lose your job. The amount needed depends on your DTI ratio, down payment and property type. Lenders may also require extra reserves if your credit score is low.

Income. Borrowers with less than a two-year employment history may be able to get a mortgage with a new job if the position is salaried and starts within 90 days of the loan closing date. One note: The HomeReady program is for low- to moderate-income borrowers — check the income limits in your area to see if you’re eligible.

Loan limits. The Federal Housing Finance Agency (FHFA) sets conforming loan limits each year based on changes in average home prices. As of 2022, the maximum conforming conventional limit is $647,200 for a single-family home in most parts of the country. Higher limits, called “high-balance loans,” are available in higher-cost areas of the country. Limits are also higher if you’re buying a two- to four-unit home.

Home value. Most homeowners will pay between $300 to $500 for a home appraisal, but some may be eligible for a property inspection waiver (PIW) if they make a 20% down payment or have significant equity. The PIW option is unique to Fannie Mae loans: Government-backed purchase loans (FHA, VA and USDA) require home appraisals regardless of how much you put down.

Title. Fannie Mae guidelines require the lender to review the property’s title history and ensure it’s clear of any prior ownership claims from previous owners or any judgments or liens, such as unpaid property taxes. Title insurance is required to cover the loan amount on the purchase or refinance of any Fannie Mae loan.

Property types. Conventional loan requirements allow you to finance a home with up to four units in a regular subdivision, a co-op, condominium building or a planned unit development (PUD). Fannie Mae offers a manufactured home loan program for manufactured homes attached to a permanent foundation.

Occupancy types. You can use a Fannie Mae loan to finance a primary or secondary residence, or an investment property. On the other hand, government-backed loans are restricted to primary homes only, in most cases. One caveat: The down payment requirements are higher for second homes (10% minimum) and investment properties (20% minimum).

Mortgage insurance. A big advantage of conventional mortgages is they don’t require mortgage insurance with a 20% down payment, while loans backed by the Federal Housing Administration (FHA) require it regardless of down payment. Conventional mortgage insurance, called PMI (private mortgage insurance), typically costs between $30 and $70 for every $100,000 you borrow, and is paid as part of your monthly payment.

Pros and cons of Fannie Mae guidelines

  You won’t pay mortgage insurance with a 20% down payment  You’ll need higher credit scores than FHA loans require
  You can buy a primary, second or investment home  You won’t qualify for the HomeReady program if you make more than the income limits
  You can borrow more than FHA loan limits allow  You’ll have to wait longer to qualify after a  bankruptcy or foreclosure compared to government-backed loans
  You may not need an appraisal  You’ll pay higher PMI premiums compared to FHA mortgage insurance premiums if your credit score is low

How to apply for a Fannie Mae home loan

Many conventional lenders offer Fannie Mae loan products. Shop around with at least three to five lenders to gather quotes, ideally on the same day. Request a rate lock once you’ve found a mortgage offer that fits your needs and budget.

Fannie Mae’s HomeReady program allows you to use approved down payment assistance (DPA) money if you’re low on cash for a down payment. Ask your lender if they offer the DPA program you’re interested in.

Fannie Mae guidelines if you can’t afford your mortgage payments

If hard financial times hit, lenders must follow Fannie Mae guidelines to help you find solutions to avoid foreclosure. Fannie Mae also offers programs for borrowers who owe more than their home is worth, known as underwater mortgages. Options may include:

Loan modifications. If you fall behind on payments or experience a sudden loss or drop in income, you can apply for a mortgage modification. Your loan servicer will work with you to come up with a short-term or permanent solution, such as lowering your rate, extending your term or reducing the balance you owe to make your mortgage more affordable.

Forbearance. A mortgage forbearance allows you temporarily stop making payments and negotiate how and when you’ll make up for missed payments. There are several ways to pay back the paused payment. Fannie Mae forbearance repayment guidelines allow you to:

  • Spread the repayment period out over time with higher monthly payments
  • Add the unpaid balance to the end of your loan
  • Pay the entire balance in a lump sum if you have the resources

Underwater refinance programs. If your home is worth less than your loan balance and you currently have a Fannie Mae loan, you may be able to lower your payment with a HARP replacement loan. In many cases, an appraisal isn’t required and you may not need as much financial paperwork to qualify.


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