Fannie Mae Guidelines: What You Need To Know for Loan Approval

If you’re applying for a conventional mortgage, you’ll need to meet Fannie Mae guidelines, which are rules conventional lenders must follow to ensure you can repay your loan. Fannie Mae mortgages are the most common type of mortgage for buying or refinancing a home, and knowing Fannie Mae guidelines improves your odds of getting a conventional mortgage approval.

What is Fannie Mae?

Fannie Mae is a nickname for FNMA, which is short for the Federal National Mortgage Association (FNMA). Fannie Mae is one of two government-sponsored enterprises (GSE) that provide lenders with cash to fund home loans at affordable mortgage rates. In turn, lenders use the cash raised by selling mortgages to Fannie Mae to fund new loans, which adds stability to the U.S. mortgage market. Lenders must follow Fannie Mae rules when underwriting conventional loans, which aren’t backed by the federal government.

Before Fannie Mae’s creation, home loans had to be repaid quickly, sometimes in as few 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.

Lenders usually need the automated system approval to approve your application

In general, unless your loan receives an approval through Fannie Mae’s automated Desktop Underwriter® system, the lender can’t approve your application. However, there is a manual underwriting process that may give you a second chance, although very few lenders offer the option for conventional loans. All of the guidelines below are incorporated into the automated system.

Fannie Mae guidelines: An overview

The FNMA selling guide details all of the rules lenders use when determining whether you’re willing and able to repay a Fannie Mae mortgage. The rules may change if there are a large number of foreclosures, or if there are major economic events. For example, during the pandemic, lenders changed rules about how employment was verified as many people were laid off or their companies were closed temporarily.

The rules for buying a home are different from the guidelines for a home refinance, and we’ll cover the minimum mortgage requirements for each.

Fannie Mae guidelines for purchase loans

→ Down payment. You’ll need at least a 3% down payment for Fannie Mae’s HomeReady® and standard loan programs 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. The minimum credit score for a conventional mortgage is 620, but you may need a higher down payment and less debt to qualify. You’ll qualify for better mortgage rates and lower private mortgage insurance (PMI) premiums with a higher credit score.

→ 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 cash reserves.

→ Cash reserves. Also called mortgage reserves, conventional lenders may require proof that you have up to six months of mortgage payments set aside to cover your mortgage if you encounter tough financial times. You may be required to prove you have the money for reserves if:

1. Your credit scores are low and you’re making a small down payment
2. You’re buying a second home or investment property
3. You’re buying a multifamily home
4. You currently own other real estate financed with mortgages

→ Income. A two-year employment is the standard requirement, but borrowers with less than a two-year employment history may be able to get a mortgage with a new job under certain conditions. Self-employed borrowers may need to provide financial documents to verify their income.

→ Income limits. The HomeReady loan is the only Fannie Mae loan program with income limits; check the 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 2023, the maximum conforming Fannie Mae loan limit is $726,200 for a single-family home in most parts of the country. Mortgages with 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. You’ll generally pay between $300 to $500 for a home appraisal on a purchase. In some cases, Fannie Mae may allow for a property inspection waiver (PIW). The PIW option is unique to Fannie Mae loans: Government-backed purchase loans (FHA loans, VA loans and USDA loans) require home appraisals regardless of how much you put down.

→ Title. Fannie Mae guidelines require a search of your property’s title history to ensure it’s free of any ownership claims from previous owners or any judgments or liens, such as unpaid property taxes. Title insurance is required to cover the sales price on a purchase or the loan amount on any Fannie Mae refinance 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 buy a primary or secondary residence, or an investment property, while government-backed loans only allow you to buy a primary residence. 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 your down payment amount. Conventional mortgage insurance, called PMI, typically costs between $30 and $70 for every $100,000 you borrow. It’s typically added to your monthly payment, but can be paid in a lump sum or financed into your interest rate.

Fannie Mae guidelines for refinance loans

Whether you’re refinancing to lower your payment, pay off your balance faster or tap equity for home improvements, you’ll need to know the Fannie Mae rules to make sure you qualify.

→ Purpose of refinance. Fannie Mae sets different rules depending on the “purpose of your refinance.” In general, the rules are more stringent if you’re borrowing more than you currently owe to some pocket cash — commonly known as a cash-out refinance. A rate-and-term refinance is a refinance that replaces your current loan with a new mortgage at a better rate, shorter term (such as switching from a 30-year to a 15-year mortgage) or a “safer” loan (such as refinancing an adjustable-rate mortgage (ARM) to a fixed-rate loan.

→ LTV ratio. Your loan-to-value (LTV) ratio is a measure of how much of your home’s value is being borrowed. When you’re refinancing, the higher your LTV ratio, the more risk there is that the lender will lose money if you default and they have to foreclose. Fannie Mae sets the maximum LTV ratios at:

• 97% if you’re refinancing to lower your payment or reduce your loan term
• 80% if you’re applying for a cash-out refinance on a primary residence
• 75% for a cash-out refinance on a two- to four unit home, second home or a one-unit investment property
• 70% for a cash-out refinance on a two- to four-unit investment property

→ Credit scores and credit history. The minimum credit score is 620 for a refinance, but may be higher if the loan doesn’t meet requirements for automated underwriting. Bankruptcy and foreclosure waiting periods are the same as for purchases.

→ DTI ratio. The maximum DTI ratio is 50%, but you may need a higher credit score to qualify for a cash-out refinance with an LTV ratio above 75% if you don’t meet automated underwriting guidelines.

→ Cash reserves. The same rules that apply to purchase loan reserves apply to most refinance loans. There are two scenarios that usually require more cash for reserves:

• Cash-out refinances on two- to four-unit homes with credit scores 680 to 699 may require 12 months of payment reserves
• Cash-out refinances with DTI ratios of 45% or higher require proof of six months of payment reserves

→ Home value. If you refinance to reduce your rate or term, you’re more likely to get an appraisal waiver than if you’re tapping equity with a cash-out refinance. If you do need an appraisal, make sure your home looks like the homes for sale in your neighborhood, because the appraiser will compare your home to recent sales and current listings.

→ Title. Your refinance lender will check for new liens on your home and require a new title insurance policy. You may have to jump through extra hoops if you’ve taken out a HELOC or home equity loan, or financed a solar system installation since you bought your home.

→ Property types. Fannie Mae sets lower LTV ratio limits on refinancing the following property types:

• Second homes
• Investment properties
• Two- to four-unit homes
• Manufactured homes

→ Occupancy types. Second homes and investment properties come with some extra guidelines. In general:

• You’ll be restricted to a lower LTV ratio
• You’ll need more cash reserves to qualify
• You’ll need higher credit scores to qualify

→ Mortgage insurance. You’ll need mortgage insurance if your refinance LTV ratio is more than 80%.

Fannie Mae interest rates: Changes in 2023

The Federal Housing Finance Agency (FHFA) announced changes to upfront fees lenders are required to pay that may affect the interest rate you’re charged for a Fannie Mae mortgage. Changes shaded in red will likely lead to a higher rate quote, while changes in green mean you may end up with a lower rate after the changes take effect on May 1, 2023.

Credit score

 A credit score between 620 and 720 may result in a better mortgage rate under the new system.

The new standard for the best rates is 780, which is a 40-point increase from the previous 740 benchmark. That means you’ll pay a slightly higher rate for a score between 740 and 779.

Debt-to-income ratio

 A DTI ratio over 40% may result in a higher rate or extra closing costs after Aug. 1, 2023.

Down payment

Those with a down payment less than 25% and credit scores between 620 and 679 may get a lower rate.

 A higher rate may result for borrowers with a down payment between 5% and 20% and credit scores between 680 and 779.

Investment properties and two- to four-unit homes

You may find better rates or lower costs on both investment properties and multifamily homes under the new fee structure. A lower payment means more of the rental income you earn goes into your pocket.

Pros and cons of a Fannie Mae mortgage vs. a government-backed mortgage