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Mortgage

Who Are Fannie Mae and Freddie Mac, and What Do They Do?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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.

Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., are both government-sponsored enterprises, or GSEs for short.

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.

Fannie Mae

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

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:

HomeReady Mortgage

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

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Allie Johnson
Allie Johnson |

Allie Johnson is a writer at MagnifyMoney. You can email Allie here

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How Credit Report Disputes Can Sabotage Your Chance for a Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Mortgage underwriting can feel like it’s taking a lifetime when it’s standing between you and your dream home. But your lender wants to make sure that you’ll be able to repay the loan, so they’ll take the time to go over your credit history with a proverbial magnifying glass.

Before you get to underwriting, you’ll want to make sure you’re a creditworthy borrower. This means maintaining a good payment history, paying down debt and disputing any errors on your credit report.

However, credit report disputes can impact your ability to get a mortgage if they’re still pending when you’re applying for a loan. This guide will explain how and why.

Why your credit reports and scores matter

One of the first things lenders look at is your credit report, which provides information about your credit history. It details whether you’ve made on-time payments on credit cards, loans and other accounts.

The information included in this report is summed up by a credit score that generally ranges between 300 and 850. The higher your score, the more creditworthy you are perceived to be.

Although credit scores aren’t the only factor that determines whether you’ll qualify for a mortgage, your credit score heavily influences the mortgage interest rate you receive. The highest scores qualify borrowers for the best mortgage rates.

Before you begin the homebuying process, it’s smart to review your credit report and have a copy handy. You can request a free credit report once a year from each of the three major credit reporting bureaus, Equifax, Experian and TransUnion, at AnnualCreditReport.com.

It’s critical to arm yourself with this information in advance. That gives you the opportunity to dispute any inaccuracies you’ve discovered and clean up your report.

What is a credit report dispute?

Credit report inaccuracies are relatively common. Inaccurate information can happen for a variety of reasons — a credit card payment being applied to the wrong account or duplicate accounts in your report giving the impression that you carry more debt than you actually do, for example.

Not only can errors harm your credit score, but they can prevent you from qualifying for a new credit account, such as an auto or home loan. That’s why it’s important to regularly keep track of the information found in your credit reports.

When you review your credit report and find an error, you have the opportunity to formally dispute it under the Fair Credit Reporting Act This is the first step to take to get the error corrected or removed.

Fortunately, it’s easier than ever to file a credit dispute with all three credit reporting agencies online.

How to file a credit report dispute

If you’ve found an error on your credit report, take the following steps to dispute it:

  1. Provide your contact information.
  2. Identify the items in your credit report that are inaccurate.
  3. Explain why you’re disputing the info and include documentation to support your dispute.
  4. Request a correction or deletion.

You’ll also want to reach out to the creditor that is reporting inaccurate information to the credit bureaus. Let them know you’re disputing the information and provide them the same documentation you’re giving to the bureaus.

In many cases, the credit bureaus investigate disputes within 30 days, according to myFICO.com.

However, many disputes can go unresolved for long periods of time, which can be troublesome for consumers applying for a mortgage. Many loan applicants don’t realize an open credit report dispute can raise a red flag to lenders and may even prevent mortgage approval.

When to file a credit report dispute

You’ll want to file a dispute as soon as you spot an error on any of your credit reports, but if you’re thinking about buying a home in the near future, it’s best to exercise caution when filing disputes, especially right before you apply for a mortgage.

Although the dispute investigation can wrap up in 30 days, it could last as long as 90 days, so it’s best to avoid filing new disputes a few months prior to starting the homebuying process.

How mortgage lenders view credit disputes

When a dispute is filed, credit reporting agencies are required to label the item as “in dispute.” The dispute itself doesn’t impact your FICO Score. However, your score may temporarily deflate or inflate while the disputed items are being investigated.

Mortgage lenders know credit reports with disputed items don’t paint the most accurate picture of a consumer’s creditworthiness and many require this status be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make — accept costly credit report errors or delay applying for a loan until disputes have been resolved.

Here’s how lenders who provide conventional and FHA loans consider credit report disputes when determining whether a consumer qualifies for a mortgage.

Conventional loans

Both government-sponsored enterprises, Fannie Mae and Freddie Mac, have automated underwriting systems that alert lenders to existing credit report disputes. These entities don’t issue loans, but buy mortgages from lenders that follow their rules.

Fannie Mae’s system initially reviews all accounts on a borrower’s credit report, even those that are being disputed. If the borrower would be approved for the loan even with the account in question, the loan moves forward. But if the disputed account would push the borrower into the “rejection” category, the system will direct the lender to investigate whether the dispute is valid.

Lenders using Freddie Mac’s system are required to confirm the accuracy of disputed accounts. The borrower would need to have the accounts corrected before the loan can move forward.

FHA loans

FHA-approved lenders require borrowers with disputed delinquent accounts on their credit report to provide an explanation and supporting documentation about their dispute. If the account has an outstanding balance of more than $1,000, the loan must be manually underwritten, which means the loan officer has to review the loan application and supporting documents outside of the automated system.

The loan officer goes over the paperwork included in the borrower’s file very closely to determine their risk of mortgage default and whether they qualify for the loan program that they’re applying.

Disputed medical accounts are excluded from consideration, but disputed accounts that are paid on time must be factored into the borrower’s debt-to-income ratio.

How to remove a lingering credit report dispute

Gaining access to a new credit report with updated information is not an option for the borrower if the creditor won’t correct the information. And when a consumer files a complaint with the credit reporting agencies, the agencies will often defer to the creditor.

Just as you’ve reached out to your creditor and the credit reporting bureaus to file your dispute, you’ll want to take the same action to remove it. Contact the creditor directly and request that they update the account information to show that it’s no longer being disputed.

You may also want to reach out to Equifax, Experian and TransUnion to request dispute removal, but keep in mind they may also reach out to the creditor who is reporting the disputed account. See the FICO website for more information about contacting each bureau’s dispute department.

The bottom line

Dealing with an unresolved credit report dispute can turn into a consumer nightmare. Even if you’ve followed best practices, you may still be unhappy with the results.

Fortunately, you can still submit a complaint to the Consumer Financial Protection Bureau. They will forward your complaint directly to the company in dispute and work to get a response from them. Another option is to seek guidance from a consumer advocate or an attorney. The National Foundation for Credit Counseling may be a helpful place to start.

Credit reports and scores have such a strong influence on lifelong financial health, so the most effective defense is to be proactive about making sure yours are in the best shape possible. Regularly monitoring your credit profile and working to fix inaccuracies before applying for a mortgage is a good game plan to prevent major problems as you embark on the homebuying process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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