If you’re shopping around for a mortgage, you may have heard about Fannie Mae and Freddie Mac. Even though these institutions don’t give loans, they are big players in the mortgage industry.
Many banks and financial institutions wouldn’t be able to give loans without the help of these companies. But, what is the role of Freddie Mac and Fannie Mae in the industry?
There’s more to it than what meets the eye when we talk about these companies.
Not sure how these companies help banks approve your loan? We have you covered.
We’ll discuss the difference between Fannie Mae and Freddie Mac and their importance in the industry. Read on to learn more.
Where to Start: The Basics About the Mortgage Industry
Before going into the differences between Fannie Mae vs Freddie Mac, we must discuss the basics of the mortgage industry. You may think these companies aren’t important because they don’t give loans. But, these companies are the reason why your mortgage loan interests can stay low.
The United States is one of the few countries where your mortgage loan term can be up to 30 years. You might think lenders are going to wait until you pay the loan in full. Yet, many financial institutions sell your mortgage to other companies in the secondary mortgage market.
This market is where lenders sell mortgage loans to investors. Fannie Mae and Freddie Mac are the companies that buy most of these loans.
By buying these mortgage loans, these institutions help keep your loan interests low and allow banks to level the risk of financing loans. After these companies purchase the mortgages, they pool them into mortgage-backed securities that are sold to investors.
What Is the Difference Between Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are government-sponsored companies under the Federal Housing Finance Agency. It may look as if these companies are two birds of a feather. Yet, their differences range from the year of establishment to the down payment terms.
Here are some of the major differences between Fannie Mae and Freddie Mac.
1. Date and Purpose of Their Creation
The U.S. Congress created both companies. The government created Fannie Mae in 1938 to stimulate the housing market in the United States. The main purpose of this company is to increase homeownership for Americans of all backgrounds.
Fannie Mae aimed to help borrowers from low to high income. In its beginning, this institution could only purchase government-insured loans.
Freddie Mac was created in 1970. The purpose of its creation was to promote competition in the market. Before Freddie Mac, Fannie Mae was the only government entity buying loans in the secondary mortgage market.
When the government created Freddie Mac, they allow Fannie Mae to start buying mortgages that weren’t insured by the government. This promoted homeownership by offering more options to first-time and repeat homebuyers.
2. They Don’t Buy from the Same Lenders
Even though both government-sponsored companies purchase home loans, they don’t buy their loans from the same lenders. Fannie Mae tends to buy their loans from commercial banks.
Some examples of these financial institutions are Chase, Bank of America, Assets America, Inc, among others. In contrast, Freddie Mac buys their loans from smaller financial institutions also known as thrift banks.
3. The Loan Programs Offered
Each company offers their own loan programs. Even though these programs are similar, the approval and requirements may vary.
Fannie Mae offers a program for low to moderate income borrowers called HomeReady. It’s designed for first-time and repeat buyers with great credit scores.
Freddie Mac offers their program HomePossible for the same type of borrowers. In contrast, borrowers without a good credit score may be eligible for this loan program. This option isn’t available with Fannie Mae.
4. Down Payment Requirements
Both companies purchase conventional loans. But, the down payment requirements for their programs vary. Fannie Mae requirements will depend on the type of mortgage loan.
It will change depending on your loan being at a fixed or variable rate. Freddie Mac is flexible when it comes to their down payment requirements.
Under their HomePossible program, they may require a down payment of as low as 3 percent. On their other loans, they may require a minimum down payment of 5 percent.
5. Recognition of Credit Report Errors
Both Fannie Mae and Freddie Mac use automated underwriting systems. These systems help speed your approval process. But, it also allows the possibility of denying your loan based on errors in consumer information such as credit reports.
Fannie Mae’s policies don’t recognize credit report errors as Freddie Mac does. So if there’s an error on your credit report, Fannie may deny your loan. But, you may have the option to get your loan approved by Freddie Mac.
6. Borrower Financial Requirements
Besides their loan programs, one of the biggest differences between these companies is their approval guidelines. Freddie Mac is more flexible when it comes to credit history and scores. The company is open to working with customers with low credit scores, poor credit history, and high debt-to-income ratios.
Fannie Mae prefers borrowers who have owned at least three credit lines for some time. In contrast, Freddie Mac may approve a loan for a borrower with less.
Why Are Fannie Mae and Freddie Mac Important?
Fannie Mae and Freddie Mac are important because they make buying your dream home possible. Their loan programs offer flexibility when it comes to financing approval and terms.
Your lender should be able to provide more information regarding your eligibility for these programs. The loan terms and requirements will vary depending on your financial information and property.
The difference between Fannie Mae and Freddie Mac makes them essential to the United States mortgage industry. Remember that each company purchases loans from different financial institutions. If a major bank financed your purchase, there’s a high probability Fannie Mae purchases your loan.
In contrast, Freddie Mac might buy your 30-year loan if it was backed by a small bank. You could say that these government-sponsored companies level the mortgage industry field.
Want to learn more about the mortgage industry? Check out our Money section for more insightful articles.