Fannie Mae and Freddie Mac: Why They Matter When Getting a Mortgage

Fannie Mae and Freddie Mac don't issue mortgages but set the standards you may have to meet to get a home loan.
Hal M. Bundrick, CFP®
By Hal M. Bundrick, CFP® 
Edited by Beth Buczynski Reviewed by Michelle Blackford

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Fannie Mae and Freddie Mac are the financial fuel that power the mortgage loan industry. The two entities are officially named the Federal National Mortgage Association (FNMA or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”).

Despite the government-sounding titles, these organizations are actually shareholder-owned, for-profit companies that influence the issuance of many of America's home loans.

Or more accurately, were shareholder-controlled companies — until the government took over operation of the firms following the mortgage crisis in 2008.

Fannie and Freddie shareholders are suing to regain control. The government bailed out the companies to the tune of $191 billion, and they have since paid $312 billion in dividends to the Treasury, according to ProPublica.

Regardless of their ownership structure, Fannie and Freddie still drive many of the underwriting decisions lenders make, and knowing more about how they work may be helpful when navigating the mortgage application process.

Government-sponsored enterprises

Fannie Mae and Freddie Mac are considered government-sponsored enterprises, or GSEs. That simply means both companies were created by Congress and authorized to perform important functions on the government's behalf: to provide "liquidity, stability and affordability to the mortgage market," the Federal Housing Finance Agency says. The FHFA oversees Fannie and Freddie.

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What Fannie Mae and Freddie Mac do

Fannie and Freddie buy about half of all the mortgage loans that lenders make. That provides lenders with the capital to make more loans. Because lenders want to sell their loans to the GSEs, they structure mortgages to Fannie and Freddie standards.

Many of the mortgages that Fannie and Freddie buy are then assembled and sold as mortgage-backed securities into the bond market.

How to qualify for a loan approved by Fannie Mae or Freddie Mac

While separate companies, Fannie and Freddie's home loan guidelines are nearly identical and establish some of the basic terms of home loans, including the debt-to-income ratio and the required down payment.

Generally, conventional mortgages that meet Fannie or Freddie standards require a minimum 620 credit score. To avoid mortgage insurance, you'll want to put at least 20% down.

Mortgages also must be below the conforming loan limit to adhere to Fannie and Freddie guidelines. That's typically in the half-million-dollar range, except in high-cost areas.

Frequently asked questions about Fannie Mae and Freddie Mac

Is Fannie Mae the FHA? No. The Federal Housing Administration is a government agency that insures loans made by lenders to borrowers with low to moderate incomes. FHA loans have more relaxed credit standards than conventional loans purchased by Fannie Mae and Freddie Mac.

What is the difference between a Fannie Mae loan and a conventional loan? They are the same. Conventional loans are the mortgages purchased by the government-sponsored enterprises of Fannie Mae and Freddie Mac.

What are the benefits of a Fannie Mae loan? Fannie and Freddie loans have competitive interest rates and low down payment options. But the biggest benefit of Fannie and Freddie loans: They are the mortgages most lenders prefer to make. There is a ready market where lenders can sell the loans, earn a profit and gain more capital to make additional loans.

Can you get a loan directly from Fannie Mae or Freddie Mac? No, the GSEs only buy qualifying loans from lenders.

How will I know if my loan is sold to Fannie or Freddie? Likely you won't. The GSEs won't collect your monthly payment or perform a borrower-facing service. However, they may assist your lender or loan servicer if you are seeking a mortgage loan modification, forbearance plan or disaster relief. You can see if your loan is owned by either firm by using a search tool provided by Fannie Mae or Freddie Mac.

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