By Wendy Connett
If you are looking to apply for a Fannie Mae loan you might be surprised to learn that the mortgage giant does not provide mortgages directly to borrowers.
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, purchases and guarantees loans via the secondary mortgage market. A government-sponsored enterprise (GSE) founded in 1938 by Congress during the Great Depression to stimulate the housing market, it's instrumental in facilitating home-ownership and the largest funder or backer of 30-year fixed-rate mortgages. (For more, see: Fannie Mae: What it is and How it Operates.)
By investing in the mortgage market Fannie Mae creates more liquidity for lenders, such as banks, thrifts and credit unions. This allows them to underwrite or fund more mortgages, which in turn increases availability to borrowers.
In order to obtain a loan that is backed by Fannie Mae, you’ll have to go through a lender that is approved by the GSE. Lenders must meet eligibility and underwriting criteria that ensures the credit quality of the loan, for example. This includes not engaging in unethical subprime lending practices. Subprime loans are offered to borrowers with poor credit who are considered a higher risk by the lender and have higher interest rates than prime rate loans. (For more, see: Subprime Lending: Helping Hand or Underhanded?)
Conforming Loans
Mortgages purchased and guaranteed by Fannie Mae must also meet its guidelines and are called conforming loans. The limit for a conventional loan for a single-family home in 2014, for example, is $417,000 for most areas and $625,000 for high-cost areas, including Hawaii and Alaska. The Federal Housing Finance Agency (FHFA) sets these limits. To see the FHFA loan limits, click here.)
Generally speaking, conforming loans have lower interest rates than non-conforming or jumbo loans, which are typically not backed by Fannie Mae and exceed its loan size limits.
Applying for a Loan
When you have found a lender who is eligible to issue a Fannie Mae-backed loan they will help you fill out a Uniform Residential Loan Application. You can download the application here. You will need to gather and provide financial information and documentation. This includes a record of employment and your income and statements to back it up, such as a W-2 or 1099. You will also have to provide your monthly debt, such as credit cards, car payments, alimony and child support. (For related reading, see: Top Reasons to Apply for an FHA Loan.)
Debt-to-Income Ratio
In order to be approved for a Fannie Mae-backed loan, having a front-end debt-to-income ratio (DTI) of no more than 28% is preferable. A front-end DTI determines how much of your gross income goes towards housing costs. If your DTI is too high, if you can, make a larger down payment, which will reduce your monthly costs. Fannie Mae requires a minimum down payment of 5% for a fixed-rate mortgage, although 20% is typically ideal.
Credit Requirements
Homebuyers must also meet minimum credit requirements in order to be eligible for Fannie Mae-backed mortgages. For a single-family home that is a primary residence, a FICO score of at least 620 for fixed-rate loans and 640 for adjustable-rate mortgages (ARMs) is required. (For more, see: Mortgages: Fixed-Rate vs. Adjustable Rate.)
FICO is an acronym for the Fair Isaac Corporation, which created the score. A FICO score is determined by mathematical models that analyze your payment history, level of debt, types of credit used, length of credit history and new credit to determine your credit risk. Scores range between 300 and 850. (For more, see: How FICO Scores are Calculated.)
The better — or higher — your FICO score the more eligible you are for the lowest available interest rates. The average FICO score of borrowers of Fannie Mae-backed mortgages as of the end of 2013 was 744, according to Fannie Mae.
The Bottom Line
Since 2009, Fannie Mae has provided $4.2 trillion in mortgage credit, which made possible 4.1 million home purchases. If your credit is good and you meet Fannie Mae’s requirements and are eligible for a conforming loan, chances are you will get a lower interest rate than you would taking out a non-conforming or jumbo loan.
Morris Hagerman is a local real estate agent with Real Estate One in Royal Oak, Michigan. He serves Berkley and the other Woodward 5 communities, including Ferndale, Pleasant Ridge, Royal Oak and Huntington Woods. Hagerman is also a member of the Berkley/Huntington Woods Area Chamber of Commerce. You can contact him by phone at 248-854-8440, email at morrishagermanproperties@gmail.com or visit his web page.
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