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Fannie Mae (FNMA): What it is and how it affects your mortgage

Peter Miller
The Mortgage Reports contributor

What is Fannie Mae?

Fannie Mae — short for the Federal National Mortgage Association — dominates the secondary mortgage market. But what exactly does that mean?

Along with its counterpart, Freddie Mac, Fannie Mae purchases about 66% of America’s mortgages from the lenders that originate them.

This frees up money so those companies can keep on lending and buyers can keep on purchasing homes.

In large part, Fannie Mae and Freddie Mac are also behind the rate you get from your mortgage lender. The two play a big role in keeping U.S. mortgage rates relatively low.

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What does Fannie Mae do?

Fannie Mae is a massive player in the mortgage process, and yet very few borrowers understand what it really does.

It doesn’t have any branches or ATMs. You can’t borrow money from it. And yet, magically, the interest rate you pay and the type of mortgage financing you get are very much impacted by Fannie Mae.

To understand how Fannie Mae works, consider a local bank or mortgage company.

If Smith Lending has $25 million that it can use to originate mortgages — and if the typical mortgage is $200,000 — then Smith has the ability to generate 125 mortgages. ($200,000 x 125 = $25 million.)

In this example, if you’re mortgage customer number 126 at Smith Lending, you’re out of luck. There’s no money left to lend.

That’s where Fannie Mae and the secondary mortgage market come into play.

How Fannie Mae and the secondary mortgage market work

Fannie Mae and Freddie Mac operate in the secondary mortgage market.

There, they buy mortgages from lenders and repackage them as mortgage-backed securities (MBS). Fannie and Freddie then sell MBS to investors all over the world.

Going back to the example above: The 125 mortgages Smith Lending has sold are actually an asset. Smith can take those loans and sell them to Fannie Mae or Freddie Mac.

Once the sale is complete, Smith has new cash and can now fund additional mortgages in the local community.

You can see the benefit. By purchasing mortgages, Fannie Mae and Freddie Mac enable lenders to make more loans. With more lending money available, consumers keep buying homes, and the real estate market stays afloat.

In addition, these companies take worldwide investor money and place it into the US housing market.

More money for mortgages means — you guessed it — lower mortgage rates. Since Fannie and Freddie operate nationwide, the result is that mortgage rates are largely similar across the country.

How Fannie Mae impacts your mortgage

Fannie Mae is happy to buy mortgages from lenders — but not every mortgage.

For Fannie Mae and Freddie Mac to be able to re-sell loans, they need to be considered safe investments. That means each mortgage must meet certain requirements or “guidelines.”

Fannie Mae guidelines run more than 1,200 pages. For instance, for 2019 the maximum loan limit Fannie Mae will purchase is $484,350. The company will not purchase bigger loans, so-called “jumbo” financing.

Thanks to these types of guidelines, Fannie Mae has a large role in deciding which mortgage applicants are considered “eligible,” and which aren’t.

Fannie Mae guidelines: conforming and conventional mortgages

Loans that conform to Fannie Mae and Freddie Mac’s guidelines are called (not surprisingly) “conforming” mortgages.

Another term you might have heard is “conventional” financing. A conventional mortgage is simply a non-government mortgage. These loans are not backed by the FHA, VA or USDA.

In effect, it’s possible for a mortgage to both “conforming,” meaning it meets Freddie/Fannie guidelines, and “conventional,” meaning it’s not insured or guaranteed by a government program.

Fannie Mae and Freddie Mac’s guidelines are important in the mortgage world.

These requirements can include things like:

  • The size of the home loan (limits varies by state)
  • Minimum credit score requirement (usually 620)
  • Down payment requirements (can be as low as 3%)
  • Private mortgage insurance (required with less than 20% down)
  • Debt-to-income ratios (generally up to 43% is allowed)

However, as a borrower, you also need to know that guidelines are often not absolute.

If you have a lot of monthly bills, for example, your debt-to-income ratio (DTI) could be high. In theory, this would make it hard to qualify for a conforming loan. However, “compensating factors” like a large down payment or beefy savings account could help offset that DTI and let you qualify.

In short, Fannie Mae and Freddie Mac’s loan guidelines are often less strict than borrowers might believe.

Flexible home loans backed by Freddie Mac: the HomeReady mortgage

A Fannie Mae program with lots of exceptions to the usual guidelines is the HomeReady mortgage.

Rather than 5% down you can qualify for the HomeReady program with just 3% up front. Need more income to qualify? Up to 30% of the buyer’s income can come from a roommate. And nope, you don’t have to be a first-time buyer.

For more information regarding Fannie Mae products and services speak with loan officers. Ask about compensating factors if you need them.  

Is Fannie Mae owned by the government?

Fannie Mae (FNMA) was started by the federal government in 1938. It was designed to help re-start the housing market after the Great Depression. 

Because Fannie was started by the government, it’s known as a “government-sponsored enterprise” or GSE.

Fannie Mae was spun off to shareholders in 1968 and is now listed in the over-the-counter stock exchange. It’s now the 22nd largest company in the US by revenue according to Fortune.

Fannie Mae now has private shareholders. However, in 2008, both Fannie Mae and Freddie Mac were placed in a “conservatorship” by the federal government after the mortgage meltdown.

According to ProPublica, Fannie received $120 billion from the federal government and has paid back almost $185 billion. At this writing it is still operated by the federal government, a matter being challenged in court.

Verify your new rate (Oct 18th, 2019)