If you’re on the hunt for a new house or have bought one in the past, you’ve probably come across Fannie Mae and Freddie Mac, and wondered what role they might play in helping you move into your dream home.
One of the main ways these two GSEs benefit borrowers across the country is by helping to keep affordable mortgages widely available, said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. They keep mortgage money flowing, guarantee home loans to make them less risky to investors and offer mortgages designed to help middle- and lower-income buyers get homes.
“Their mission is to expand, promote and support homeownership,” Kapfidze said.
What is a GSE?
The federal government created GSEs to help make it easier to buy homes. In the early 1900s, single-family homeownership was becoming more important to the U.S. economy, but it was still difficult to get a mortgage to buy a house.
Banks would make home loans, but buyers often had to put at least 50% down and repay the loan within five years. These terms put mortgages out of reach of many consumers.
While GSEs were created by Congress to address this problem, they are not government agencies, and they’re not run by the federal government. GSEs are private companies that are important to the U.S. economy and play a role in the public good. GSEs are privately owned, and each one answers to a board of directors.
Today, Fannie Mae and Freddie Mac help mortgage markets work more smoothly by making mortgages more affordable, making more cash available for home loans and helping to keep mortgage markets stable.
However, borrowers don’t interact directly with Fannie Mae or Freddie Mac, Kapfidze said. “You get your loan from your lender, and the lender’s the one dealing with Fannie and Freddie,” he said.
What Fannie and Freddie do
Fannie Mae and Freddie Mac help mortgage markets work better by performing several important functions. For example, Fannie and Freddie:
- Buy mortgages from lenders. Fannie Mae and Freddie Mac buy mortgages from banks and other lenders. The lenders can then use the money from those sales to make more loans.
- Guarantee mortgage securities. After buying the mortgages, Fannie and Freddie sometimes package them into mortgage-backed securities (MBS) that can be sold to investors. Fannie and Freddie make these investments safer by guaranteeing that the mortgages will be paid on time. “It’s like an insurance program that they offer,” Kapfidze said. “So if somebody defaults on a loan, Fannie and Freddie make sure that the investors get paid.”
- Provide liquidity to the housing market. Fannie and Freddie offer banks, mortgage companies and other lenders a steady, ongoing supply of cash that can be used to make home loans.
- Help make housing more affordable. Both Fannie and Freddie work with lenders to offer affordable mortgages with low down payments for buyers who might have a hard time qualifying for a conventional mortgage. They also offer programs that help both homeowners and renters stay in their homes.
- Add stability to mortgage markets. Fannie Mae and Freddie Mac help to keep mortgage markets stable during recessions and other tough times in which it becomes harder to borrow and some homeowners are at risk of losing their homes.
Congress created Fannie Mae in 1938 in response to a housing crisis during the Great Depression. At the time, it was common to buy homes with short-term loans that did not offer the best terms, and many Americans lost their homes during the Depression. Fannie Mae made it possible for banks to offer 30-year mortgages with fixed interest rates that made it easier for Americans to buy homes.
The formation of Fannie Mae was one government response to the economic challenges that the country had gone through, Kapfidze said. “The idea was, let’s help people build wealth and be able to finance and buy homes,” he said.
Fannie Mae offers the HomeReady® Mortgage, and other mortgage programs, to help low- and moderate-income buyers get affordable mortgages. Fannie Mae also offers shared equity programs to let low-income buyers purchase homes at below-market rates. And Fannie Mae helps renters by making financing available to investors to buy multifamily buildings and offering affordable leases to help renters stay in foreclosed homes.
Freddie Mac was chartered by Congress in 1970, when it began buying loans from lenders to allow them to make more loans. Freddie Mac currently buys conventional mortgage loans from single-family homes and funds loans for multifamily housing units, most of which are rented at rates affordable to low- and moderate-income tenants. Freddie Mac also adds to the liquidity of the mortgage markets by investing in mortgage-related securities.
Freddie Mac offers a variety of mortgage programs, including the Home Possible® Mortgage for low- and moderate-income homebuyers and no-cash-out refinancing, as well as the HomeOne(SM) Mortgage for first-time homebuyers. Freddie Mac also works with lenders to help struggling borrowers avoid foreclosure and keep their homes.
HomeReady and Home Possible
Both Fannie Mae and Freddie Mac offer mortgage programs to help borrowers with low to moderate incomes. Here are details on two of these programs:
The HomeReady Mortgage from Fannie Mae is available to homebuyers with low to moderate income and a credit score of at least 620. There are no income caps if buying in a low-income census tract, but in other areas, the maximum income is 100% of the area median income (AMI). The loan also is available for homeowners who want to refinance their current loan. The benefits of the HomeReady Mortgage include:
- A low down payment of 3%
- Down-payment funds can come from multiple sources, including gifts. “Typically you would have to have a down payment that’s from your own funds, but this helps folks access down payments in different ways,” Kapfidze said.
- The borrower can cancel mortgage insurance when his or her loan balance reaches less than 80% of home value. Mortgage insurance is typically required when borrowers put less than 20% down on a home, and being able to nix it as soon as equity rises high enough can save homeowners a lot of money over the life of the loan.
HomeReady borrowers must complete an online homeowner education course in order to qualify for the loan.
Home Possible Mortgage
The Home Possible Mortgage from Freddie Mac is available to low- and moderate-income homebuyers. There are no income limits when buying in low-income census tracts. Otherwise, income can be no higher than 100% of AMI. Pros of the program include:
- Down payment as low as 3%
- Borrowers can use flexible funding sources, including cash gifts, employee assistance programs and even “sweat equity” to help pay their down payment and closing costs
- Can apply with co-borrowers who will not live in the home
- Home borrowers with no credit score may still be able to qualify
- The borrower can cancel mortgage insurance after loan balance drops below 80% of home value
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