Fannie Mae is a shareholder-owned company and the largest supplier of home mortgage funds. The company guarantees mortgages that comply with its funding guidelines.
The enterprise does not issue loans, but buys mortgages on the secondary market and sells them as mortgage-backed securities to investors on the open market. This increases mortgage liquidity, which enables mortgage lenders to write additional loans. As a government sponsored enterprise, Fannie Mae was chartered by Congress to maintain the strength of the U.S housing and mortgage industry.
But Fannie Mae is not the only government sponsored enterprise created to help maintain the flow of funds available to mortgage lenders. Freddie Mac also purchases home loans on the secondary market.
Fannie Mae and Freddie Mac share the same business model and mission, but there are differences between the two enterprises. Fannie Mae was created during the Great Depression with the goal of providing affordable housing to families, which in turn helps strengthen a weak economy. Freddie Mac was created in 1970 to prevent Fannie Mae from having a monopoly on the secondary mortgage market.
These rival enterprises guarantee about 50 percent of mortgage loans. Fannie Mae and Freddie Mac work with lenders on the secondary market, thus homeowners are typically unaware when Fannie or Freddie owns their mortgage loan.
Fannie Mae does not purchase every type of home loan, but rather mortgages that conform with the agency’s underwriting requirements. Fannie Mae sets the guidelines for loans and the agency has specific rules regarding a borrower’s income, debt and credit history.
The agency requires two years of income documentation from borrowers, in which their income must remain consistent or increase. The minimum credit score for a Fannie Mae mortgage is 640, an increase from the previous minimum of 620. A borrower’s debt-to-income ratio cannot exceed 45 percent, and their mortgage payment cannot exceed 36 percent of their gross monthly income. Fannie Mae guidelines also require a 5 percent down payment, although some lenders may require as much as 10 percent down.
Fannie Mae has a program designed to help distressed homeowners avoid mortgage foreclosure. With the assistance of this program, homeowners learn about refinancing options, mortgage modification and other available provisions to avoid foreclosure and continue living in their home.
A mortgage foreclosure significantly lowers credit scores, plus foreclosures remain on credit reports for up to seven years. Too many foreclosures in a particular area can reduce property values, thus foreclosure prevention helps strengthen communities.
While Fannie Mae strives to help struggling homeowners keep their properties, foreclosure is inevitable when a borrower cannot maintain the mortgage payment. Fannie Mae-owned foreclosures are resold, and the Fannie Mae HomePath program facilitates the quick sale of foreclosure by loosening the finance requirements.
With the Fannie Mae HomePath mortgage, buyers can purchase a Fannie Mae foreclosure with no appraisal, a 3 percent down payment and no mortgage insurance. This incentive is available on owner occupant properties, as well as investment properties. In addition to the HomePath mortgage, there is the HomePath Renovation mortgage. The latter provides borrowers with funds to complete light/moderate renovations – up to $35,000.