Fannie Mae: Mortgage Programs and How They Work

By: Peter Warden Updated By: Aleksandra Kadzielawski Reviewed By: Craig Berry
September 19, 2023 - 7 min read

In the labyrinth of homeownership, where dreams meet reality, one entity stands as both guide and gatekeeper: Fannie Mae.

According to its website, “In 2022, Fannie Mae enabled the financing of approximately 2.6 million home purchases, refinancings, and rental units.”

Clearly, it holds a significant position in the mortgage market. And it’s one enterprise every home buyer should be familiar with. But what exactly lies behind this financial giant?

Read on as we delve into the range of loan products Fannie Mae offers. We’ll even help you decide if these options align with your needs and if you meet the eligibility criteria.

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What is Fannie Mae?

Fannie Mae, often referred to simply as “Fannie,” officially bears the name of the Federal National Mortgage Association.

Fannie and its little brother, Freddie Mac, are government-sponsored enterprises (GSEs). That means they’re private companies but were established and chartered by the federal government.

Fannie is the larger and was founded in 1938. Freddie was established in 1970.

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Technically, neither Fannie nor Freddie are backed by “the full faith and credit” of the U.S. government. But, in practical terms, the government might have to bail them out if they ever get into deep trouble. Therefore, Congress and the administration keep a close eye on their books and have appointed a regulator.

Neither GSE lends money to home buyers or originates loans. Instead, they agree to purchase loans after closing from private lenders. However, those loans must conform to the rules Fannie and Freddie laid out for the GSEs to buy them.

Conventional and conforming mortgages

So, mortgages that are eligible to be purchased by these two GSEs are called “conforming loans.” And conforming loans are a subset of “conventional loans,” which is the term for all loans not directly backed by the federal government.

In other words, you can correctly call Fannie and Freddie’s mortgages “conventional loans.” But you’ll be more precise when you describe them as “conforming loans.”

Nonconventional mortgages include ones "backed" (partly guaranteed) by the Federal Housing Administration (FHA loans), the Department of Veterans Affairs (VA loans), and the U.S. Department of Agriculture (USDA loans).

What are Fannie Mae’s loan requirements?

Naturally, you’ll find pages of rules covering Fannie’s requirements for photo ID, residency status, Social Security Number(s), document verification and so on. There are also many directives governing the condition and standards of the prospective home.

However, those rarely affect the majority of borrowers and typically fall within the responsibility of the private lender. So, let’s further explore Fannie Mae’s loan requirements.

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Fannie Mae expects you to:

  1. Have a credit score of 620 or higher
  2. Contribute a down payment of at least 3% of the home’s purchase price — Find out about down payment assistance programs that might provide some or all your down payment needs
  3. Have a debt-to-income (DTI) ratio of between 36% and 50%, depending on your credit score — Learn what DTI is and how to calculate yours
  4. Demonstrate a stable income stream going back at least two years — That usually means you’ll need a consistent employment record, but other income sources may be acceptable. You must document all this

Note that individual private lenders can’t loosen these rules, but they do reserve the right to make them stricter. If you find a lender that won’t lend to you even though you meet these criteria, consider exploring alternate ones. Plenty are happy to do business based on Fannie’s rules.

Freddie Mac’s rules are very similar to Fannie’s because they share the same regulator. So, if your credit score is below 620, you’ll likely have to consider applying for an FHA loan, which sets a 580 credit score threshold for applicants with a 3.5% down payment.

Mortgage insurance

However, that choice has longer-term financial implications. When you opt for a Fannie or Freddie mortgage, you may be eligible to get rid of mortgage insurance as soon as the loan balance reaches 80% of your home’s market value.

But with an FHA loan, depending on your down payment, you’ll have to pay mortgage insurance for at least 11 years, or possibly the lifetime of the loan. And that can significantly add up.

So, if you’re a bit short of the 620 threshold, try to raise your credit score to escape perpetual mortgage insurance.

If you’re eligible for a VA loan, you will likely get the best possible deal, as VA loans do not require mortgage insurance.

Fannie Mae’s mortgage programs

Fannie’s portfolio of mortgage products includes several flavors. If applicable, check out specialized ones offered for people wanting to buy manufactured homes, Native American home buyers, and those embarking on construction projects.

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Fannie Mae Conventional 97

The Conventional 97 name refers to the 97% of the purchase price that the mortgage can cover. That leaves just 3% for you to provide as a down payment.

There’s a cap on the size of the mortgage you can get, which is based on home prices in your area. But these are typically fairly generous, provided you have the financial means to afford monthly payments. To check the exact conforming loan limit in your homebuying area, input its ZIP code on this webpage.

Conventional 97 is the vanilla flavor of Fannie’s loans. And the borrower eligibility criteria align with those listed above.

Fannie Mae HomeReady

HomeReady stands as a specialized program designed for first-time home buyers on low incomes. However, it’s worth noting that existing homeowners can use it to refinance. HomeReady still has that generous minimum down payment requirement of 3%.

You can’t earn more than 80% of your area median income (AMI) to be eligible. Don’t know your AMI? Most people don’t. But you can check yours on this convenient area median income lookup tool.

What sets Fannie Mae’s HomeReady program apart is its more generous approach to income consideration. For example, the rent any roommate(s) pay could be considered if it’s properly documented.

HomeReady loans offer reduced mortgage insurance coverage for loan-to-value ratios above 90%. You’ll still need a 620 or higher credit score. But your debt-to-income ratio can be as high as 50% (see above). And this flexibility, coupled with the more easygoing income rules, can make the difference between the lender approving or declining your application.

See Community Seconds (below).

Fannie Mae HomeStyle

HomeStyle is the ultimate all-in-one renovation loan. It lets you buy a home and renovate it within a single mortgage. And that saves a lot of time and money compared with the main alternative.

That alternative requires getting a purchase mortgage, finding a personal or similar loan to fund the renovation, and then later refinancing the two into one final mortgage.

Freddie Mac’s CHOICERenovation and the Federal Housing Administration’s FHA 203(k) loan serve a similar purpose to the HomeStyle loan. So, check out what each will cost before you decide how to proceed.

HomeStyle comes with its own set of guidelines. While you have the flexibility to personally undertake up to 10% of the project, you must use a licensed contractor for the rest, including all safety-critical tasks, such as wiring and natural gas piping installations.

Additionally, there will be inspections to make sure all the work is up to code and of good quality. Rest assured, these measures are as much in your interest as in Fannie Mae’s.

The down payment (3%) and credit score (minimum 620) are the same as for other Fannie mortgages. But HomeStyle allows a debt-to-income ratio (see above) that extends up to 45%. As with all Fannie products, you’ll have to document your income.

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Fannie Mae Community Seconds

Community Seconds could be for you if you haven’t saved enough for your down payment and closing costs. That’s because it allows you to finance those within a second mortgage.

In total, you might be able to borrow up to 105% of your home’s purchase price.

Normally, you repay your second mortgage in parallel with your first and make monthly payments on both loans.

But some programs let you defer payments on your second mortgage for a set period, perhaps even until you sell the home or refinance your main mortgage. But, at that point, you have to repay the entire amount (plus interest) as a lump sum.

You must pair Community Seconds with a HomeReady loan (above). But Freddie Mac has a similar program that allows you to pair its Affordable Seconds program with its Home Possible loan.

Fannie Mae HFA Preferred

An HFA Preferred mortgage allows you to work with your state’s housing finance agency (HFA, which can also stand for Housing Finance Authority) and still use a Fannie Mae product. HFAs are the biggest source of down payment assistance (and sometimes closing costs assistance) nationwide.

Each HFA sets its own rules for the help it offers. Some provide outright grants that never have to be repaid. Some offer silent, deferred mortgages requiring no monthly payments and no interest. Those may be forgiven over time or might have to be repaid when you move, sell, or refinance. Others are straightforward second mortgages that you repay in parallel with your first (main) mortgage.

Clearly, HFA assistance programs can be hugely valuable, especially to first-time buyers. So, inquire whether you can receive assistance with an HFA Preferred mortgage.

This approach can help with eligibility criteria, too. Those will likely be a combination of Fannie’s requirements (a minimum 620 credit score) and those the HFA imposes.

The bottom line

Fannie Mae is a formidable force, quite possibly the largest, within the mortgage market. What sets it apart is the rigorous oversight it operates under, ensuring transparency, trustworthiness, and reliability.

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Fannie Mae and its little brother Freddie Mac facilitate some of the most attractive mortgage packages available to many buyers with 3% down payments, sensible credit scores, and higher debt-to-income ratios.

In particular, Freddie and Fannie’s products let you escape making mortgage insurance payments when your loan balance falls below 80% of your home’s market value. That could save you thousands over time compared to FHA and USDA loans.

So, before applying for a mortgage, try to make your borrower profile “conform” to Fannie’s eligibility criteria. If you can’t, FHA or VA loans may be your alternatives.

However, when you do meet the criteria for a Fannie loan, let us help you find some private lenders that could set you up with a highly competitive deal.

Peter Warden
Authored By: Peter Warden
The Mortgage Reports Editor
Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.
Aleksandra Kadzielawski
Updated By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).
Craig Berry
Reviewed By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.