Fannie Mae vs. Freddie Mac: What’s the difference?

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If you’re new to mortgages or have recently started exploring your options for an upcoming home purchase, you’ve probably come across the names Fannie Mae and Freddie Mac.

While not knowing too much about these two entities won’t stop you from buying a home, it’s always helpful to have a little more perspective, especially when it comes to their roles and functions when it comes to mortgages and home buying process.

Below, Select breaks down what you need to know about Fannie Mae and Freddie Mac and takes a closer look at some of the lending products they offer.

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What exactly are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are both companies that buy mortgages from banks – in doing so, they essentially help banks create more cash flow so they can continue to originate and process home loans for people ordinary. Each of the two entities then retains these mortgages as part of its own portfolio or repackages them into mortgage-backed securities.

Fannie Mae is actually the nickname of the Federal National Mortgage Association, while Freddie Mac is the nickname of the Federal Home Loan Mortgage Corporation.

The first entity, Fannie Mae, was created in 1938 by the United States Congress at a time when there was a lack of affordable housing due to the Great Depression, which occurred in the United States from 1929 to 1939. Its introduction actually led to the long-term, fixed-rate mortgage, a type of mortgage that is still popular today.

More than 30 years later, Freddie Mac was established in 1970 to help develop the secondary mortgage market – a market in which lenders and investors buy and sell home loans – and to mitigate some of the interest rate risk of interest in banks.

How are Fannie Mae and Freddie Mac different?

While Fannie Mae was created before Freddie Mac, the differences don’t end there. The two companies each buy their loans from different sources – Fannie Mae buys them from big banks and credit unions while Freddie Mac buys them from smaller banks and credit unions.

Both entities buy and sell conventional loans. And while Fannie Mae and Freddie Mac are each federally backed, the loans themselves are not. Conventional loans are guaranteed by private lenders. So you wouldn’t directly apply for a mortgage from Fannie Mae or Freddie Mac, but the mortgage you get can be purchased through either company.

Loans can also be conforming or non-conforming, which means that they would meet or comply Fannie Mae and Freddie Mac’s funding criteria and would not exceed a certain amount, which changes each year. That said, jumbo loans are an example of a non-conforming loan that can be used to borrow more money than the aforementioned limit.

In terms of loan programs, Fannie Mae offers the HomeReady® mortgage, which caters to low-to-middle income homebuyers and allows them to pay down payments as low as 3%. However, certain rules apply: applicants must have a debt ratio not exceeding 50% and their income must be equal to or less than 80% of the median income of the region.

Since you cannot purchase a HomeReady® mortgage directly from Fannie Mae, you will need to apply through a lender, such as a bank or credit union. Ally Bank is one such lender that offers this loan.

Allied bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, HomeReady Loan and Jumbo Loans

  • Terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a HomeReady loan

Advantages

  • The Ally HomeReady loan allows a down payment of just under 3%
  • Pre-approval in just three minutes
  • Submission of the application in less than 15 minutes
  • Online support available
  • Existing Ally customers are eligible for a discount that applies to closing costs
  • Does not charge lender fees

The inconvenients

  • Does not offer FHA, USDA, VA or HELOCs loans
  • Mortgages are not available in Hawaii, Nevada, New Hampshire or New York

Freddie Mac, meanwhile, offers the Home Possible® mortgage, which typically requires a minimum down payment of 3%. Note that for this particular loan program, eligible applicants cannot earn more than the average income in their area.

It’s worth noting that while the 3% minimum down payment is still a bit lower than the 3.5% minimum requirement you would need for an FHA loan, if an FHA loan is a better fit for your financial situation, you should consider going with a lender like Rocket Mortgage and Chase Bank, which offer this option.

Rocket Mortgage

  • Annual Percentage Rate (APR)

    Ask online for personalized rates

  • Types of loans

    Conventional Loans, FHA Loans, VA Loans, and Jumbo Loans

  • Terms

    8 to 29 years old, including 15 years old and 30 years old

  • Credit needed

    Generally requires a 620 credit score, but will consider applicants with a 580 credit score as long as other eligibility criteria are met

  • Minimum deposit

    3.5% if you go ahead with an FHA loan

Advantages

  • Can use the loan to purchase or refinance a single-family home, second home or investment property, or condo
  • Can be pre-qualified in minutes
  • Rocket Mortgage app for easy access to your account

The inconvenients

  • Performs a thorough investigation to provide a personalized interest rate, which means your credit score may take a hit
  • Does not offer USDA loans, HELOCs, construction loans, or mobile home mortgages
  • Does not manage accounts for jumbo loans after closing

hunting bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, FHA Loans, VA Loans, DreaMaker℠ Loans, and Jumbo Loans

  • Terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a DreaMaker℠ loan

Advantages

  • The Chase DreaMaker℠ loan allows for a down payment of just under 3%
  • Discounts for existing customers
  • Online support available
  • A number of resources available to first-time home buyers, including mortgage calculators, affordability calculator, training courses and home consultants

The inconvenients

  • Does not offer USDA loans or HELOCs
  • Existing customer discounts apply to those with large balances in their Chase deposit and investment accounts

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.


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