When shopping for a home loan, there are two names that you’ll inevitably encounter: Fannie Mae and Freddie Mac. Exploring the similarities and differences between Fannie Mae and Freddie Mac can help you understand their impact on the home loan market, enabling you to make a more informed decision as you select a mortgage.
Similarities and Differences Between Fannie Mae and Freddie Mac
Its proper name is quite a mouthful, so it’s no wonder that most people prefer to refer to the Federal National Mortgage Association by its friendlier nickname: Fannie Mae. Likewise, few people immediately recognize the Federal Home Loan Mortgage Corporation. Most know it as Freddie Mac. When it comes to financing home loans, both of these organizations are major players, so it’s a good idea to learn a bit about them. What do they have in common? More importantly, what sets them apart?
Similarities Shared by Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are both government-sponsored enterprises. They are privately held corporations that were created by the U.S. Congress to serve a public purpose. Basically, they exist to enhance the flow of credit in the housing economy, encouraging home ownership and making it more affordable by keeping interest rates lower.
Fannie Mae and Freddie Mac do not make loans. Instead, they purchase home loans from lenders on the secondary mortgage market. While much of what they do is behind the scenes as far as the average borrower is concerned, their willingness to purchase home loans that meet the requirements that they set allows them to shape the types of loans available to would-be borrowers. For example, consider the matter of conforming loans. By definition, these are home loans that meet the funding criteria set by this pair of quasi-governmental entities and have totals equal or less than the limit imposed by their federal regulator, the Office of Federal Housing Enterprise Oversight. Thus, Fannie Mae and Freddie Mac influence conforming loans when they adjust their criteria.
As the Federal Housing Finance Agency makes clear, Fannie Mae and Freddie Mac share several traits and historical details:
- Both were chartered by Congress to ensure the availability of affordable mortgage funds. Chartered in 1938 as part of the New Deal, Fannie Mae is the older institution. Freddie Mac was chartered in 1970 (source).
- Both provide liquidity to banks and other lenders who offer home loans by purchasing mortgages from them, which provides them with funds that can be used to fuel additional lending.
- Both package mortgages into mortgage-based securities that can be sold to investors, drawing additional monies into the mortgage market.
- Both act as a stabilizing influence on the mortgage markets thanks to the guarantee promised by their government backing.
- Both help to keep interest rates low by increasing the liquidity of the secondary mortgage market, which makes home loans more affordable for prospective homebuyers.
Differences Between Fannie Mae and Freddie Mac
Although they have a great deal in common, there are many differences between Fannie Mae and Freddie Mac as well:
- Size of Financial Entities: Fannie Mae tends to buy loans from larger commercial banks. Freddie Mac generally purchases loans originated by smaller financial entities (source).
- Loan Programs: These two enterprises offer different loan programs. For example, Fannie Mae offers the HomeReady loan*, which works well for low-to-moderate income buyers with limited cash for a down payment, a credit score of 680 or above, and supplemental boarder/rental income. Freddie Mac has a similar program known as Home Possible, which is also excellent for low-to-moderate income buyers, especially those in high-cost or underserved communities.
- Down Payments: Fannie Mae’s minimum down payment requirement varies based on the mortgage type: fixed rate or adjustable rate. Freddie Mac, on the other hand, requires a minimum down payment of five percent for most standard loans and a down payment as low as three percent for the Home Possible program (source).
With so many different mortgage options available, it can be difficult to sort through all the possibilities. That’s why working with a financial professional can be so valuable. Thanks to their knowledge and experience, they can educate you about the pros and cons of different programs and help you select the best option for your unique situation.
If you’re interested in exploring your options, contact PrimeLending today if you live in the Kansas City area. Our committed team will help you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. When you’re ready to get started, please give us a call at 844-701-5626.
*HomeReady® is a registered trademark of Fannie Mae