What Is The Difference Between Fannie Mae And Freddie Mac

This Article Is About The Difference Between Fannie Mae And Freddie Mac

The two mortgage giants that are responsible for purchasing conforming loans are the following:

  1. Fannie Mae
  2. Freddie Mac

Fannie Mae and Freddie Mac are called government-sponsored enterprises (GSE). Both Fannie and Freddie are regulated by the Federal Finance Housing Agency (FHFA).

The majority of mortgage lenders are Fannie Mae lenders. Chances are when borrowers apply for a mortgage, lender, particular mortgage lender will submit a file to Fannie Mae. More than 90% of all lenders use Fannie Mae when running conventional loans. Fannie Mae and Freddie Mac are the two giant government-sponsored mortgage companies. Their role is to purchase mortgage loans that are originated and funded by banks, credit unions, and mortgage companies in the United States. In this article, we will discuss and cover what is Fannie And Freddie and the role of these two GSEs.

The Role Of Fannie Mae And Freddie Mac

The Role Of Fannie Mae And Freddie Mac

The role of Fannie Mae and Freddie Mac is to provide mortgage liquidity in the nation’s mortgage markets. Mortgage bankers use their warehouse line of credit to fund the loans they originate under their company name. Once they fund the loan, all lenders need to sell the loans they funded on the secondary market. Fannie Mae and Freddie Mac are the two largest buyers of mortgages on the secondary market in the United States. Once mortgage bankers sell the loans that originate on the secondary market, they will pay off their warehouse line of credit and originate more loans. This is how Fannie Mae and Freddie Mac provide liquidity in the mortgage markets. Due to Fannie and Freddie, lenders can offer home mortgages quickly and with low down payments at low mortgage rates.

Fannie Versus Freddie Agency Mortgage Guidelines

Fannie Mae has different agency guidelines than Freddie Mac:

  • Freddie Mac has different lending guidelines than Fannie Mae
  • If a lender cannot get an automated approval from DU, DESKTOP UNDERWRITER, which is Fannie Mae, the lender can submit it to LP, LOAN PROSPECTOR, Freddie Mac’s AUS
  • May get an automated approval per Freddie Mac’s automated underwriting system, LP FINDINGS
  • Not all lenders do both Fannie Mae and Freddie Mac
  • Most lenders can only underwrite Fannie Mae loans and not Freddie Mac
  • I am able to do both, Fannie Mae and Freddie Mac mortgage loans
  • So if I cannot get an approve/eligible per DU FINDINGS, I can run it through LP and see if I can get an approve/eligible per LP FINDINGS

Fannie Mae’s and Freddie Mac’s lending guidelines are different.

Fannie Mae And Freddie Mac Explained

Fannie Mae And Freddie Mac Explained

There are times where I expect an approve/eligible per DU FINDINGS, FANNIE MAE APPROVE/ELIGIBLE PER AUTOMATED UNDERWRITING SYSTEM. But for whatever reason cannot get an approve/eligible per FANNIE MAE, If I get a referred/eligible per DU FINDINGS, prior to taking the file through manual underwriting, I submit it to Freddie Mac’s Automated Underwriting System, LOAN PROSPECTOR ( LP ). Surprisingly I can sometimes get an approve/eligible per LP FINDINGS. Countless times I have run into situations where I get a denial with Fannie Mae but get approved with Freddie Mac.

Fannie and Freddie’s automated underwriting systems are very similar but has its differences. Many times, Fannie Mae has difficulty with accepting borrowers getting a gift. Fannie Mae does not like gift funds. Especially from mortgage loan applicants with lower credit scores, higher debt to income ratios, and limited credit tradelines on their credit report. Freddie Mac is not as picky with regards to gift funds as Fannie Mae. Many times when borrowers get denied by Fannie Mae, they may get approved with Freddie Mac. Fannie Mae may turn down a mortgage application with errors on the credit report. But Freddie Mac may approve that file turned down by Fannie Mae.

Pros And Cons On Fannie Mae Versus Freddie Mac

Freddie Mac is more lenient with mortgage loan applicants with poor credit history and lower credit scores. Freddie Mac is also laxer on higher debt to income ratios. This is so especially those mortgage loan applicants with debt to income ratios as high as 50% DTI. Freddie Mac is also more aggressive and understanding of mortgage applicants who have limited credit trade lines and credit history. Fannie Mae likes to see a minimum of 3 aged credit tradelines. If the mortgage loan applicant has less than 3 credit trade lines and cannot get an approve/eligible per DU FINDINGS, I suggest the loan officer submit it to Freddie Mac.

Credit Report And Automated Underwriting System

Credit Report And Automated Underwriting System

Fannie Mae does not recognize errors on a consumer’s credit report as Freddie Mac does.

For example, say a mortgage loan application filed bankruptcy:

  • The bankruptcy was discharged 2 years ago
  • All of the creditors were part of his or her bankruptcy
  • But one of the credit tradelines that was included in the bankruptcy is still reported as active

Fannie Mae may deny the mortgage application with this error but Freddie Mac may approve it.

 FHA Lending Guidelines And Automated Approval

Fannie Mae and Freddie Mac lending guidelines differ from FHA loans. With FHA Home Loans, Underwriters need to follow the FHA TOTAL SCORECARD, which is FHA lending guidelines.  The main difference between Fannie and Freddie is how Fannie Mae’s automated underwriting system interprets a mortgage loan application versus how Freddie Mac’s Automated Underwriting System interprets it.  When choosing a lender, make sure that the particular mortgage lender you choose is able to do both Fannie Mae and Freddie Mac mortgage loans.

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