In this blog post, we’ll delve into the difference between Fannie Mae and Freddie Mac. These entities play a significant role in the mortgage industry, as they purchase conforming loans. It’s important to take a closer look at each of them to understand their unique features.
- Fannie Mae
- Freddie Mac
The U.S. housing finance system relies heavily on government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (FHFA) oversees these entities.
Why is it Called Fannie Mae and Freddie Mac?
The terms “Fannie Mae” and “Freddie Mac” are colloquial names that stem from the acronyms of their official, government-established names.
Fannie Mae: Originally established in 1938 as part of President Franklin D. Roosevelt’s New Deal, the Federal National Mortgage Association is officially abbreviated as FNMA. This acronym is phonetically pronounced as “F-N-M-A,” leading to the nickname “Fannie Mae.”
Freddie Mac: The FHLMC, or Federal Home Loan Mortgage Corporation, was created in 1970 to broaden the secondary mortgage market and rival Fannie Mae. In fact, FHLMC is often referred to as “Freddie Mac,” which is a result of the acronym “F-H-L-M-C” being pronounced in that manner.
These nicknames were designed to simplify and humanize the names of these corporations, making them more accessible and memorable for the public and industry participants alike. They are now commonly used to refer to these two significant players in the U.S. housing and financial sectors, encapsulating the difference between Fannie Mae and Freddie Mac.
What Is The Role of Fannie Mac and Freddie Mac
One of Fannie Mae and Freddie Mac’s main goals is to increase the availability of funds for U.S. mortgage markets by buying mortgages from lenders. Mortgage bankers use their warehouse lines of credit to fund loans under their brand names. After funding these loans, they must be sold on the secondary market.
As the two largest purchasers of mortgages in the U.S. secondary market, Fannie Mae and Freddie Mac play important roles. Once the loans are sold, mortgage bankers can clear their warehouse lines of credit, enabling them to fund additional loans.
This process underscores how Fannie Mae and Freddie Mac contribute to market liquidity. Thanks to these entities’ operations, lenders can provide homebuyers with mortgages that have competitive interest rates and lower down payments. This discussion highlights the difference between Fannie Mae and Freddie Mac in their pivotal roles in the secondary mortgage market. Speak With Expert To About Fannie Mac and Freddie Mac
Difference Between Fannie Mae and Freddie Mac Mortgage Lenders
Most mortgage lenders primarily utilize Fannie Mae. Once a borrower applies for a mortgage, the loan application is sent to Fannie Mae by the lender. In fact, over 90% of lenders rely on Fannie Mae to process conventional loans. Fannie Mae and Freddie Mac are the two major government-sponsored enterprises (GSEs) in the mortgage sector.
Their primary function is to buy mortgage loans originated and funded by banks, credit unions, and mortgage companies across the United States. This article will explore and explain the difference Between Fannie Mae and Freddie Mac, highlighting the roles played by these two key GSEs.
Do All Lenders Do Fannie Mae and Freddie Mac Mortgages?
As a lender, it’s important to have the capability to handle mortgage loans from both Fannie Mae and Freddie Mac. While many lenders specialize in underwriting loans from either one or the other, I can provide expertise in both.
Flexibility is essential when dealing with the difference between Fannie Mae and Freddie Mac. For instance, if a loan does not receive an approve/eligible status based on the DU (Desktop Underwriter) findings from Fannie Mae, I can then submit the loan to Freddie Mac’s LP (Loan Prospector) to see if it meets their criteria for an approve/eligible status.
The lending guidelines for Fannie Mae and Freddie Mac vary, which is an important consideration for borrowers exploring their mortgage options.
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.
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. Get An Approvable for Fannie Mae, Click Here
What is the Biggest Difference Between Fannie Mae’s and Freddie Mac’s Ratio Requirements?
Fannie Mae and Freddie Mac, government-sponsored enterprises, purchase mortgages from lenders and secure them as mortgage-backed securities. They differ in their underwriting requirements, including borrower eligibility ratios.
Debt-to-Income (DTI) Ratio:
- Fannie Mae: Generally allows a maximum DTI ratio of 36% but can go up to 45% or even 50% with additional compensating factors, such as a higher credit score or larger reserves.
- Freddie Mac typically permits a DTI ratio of up to 45%. With compensating factors, it may allow a ratio as high as 50%.
Policies have been updated by Fannie Mae and Freddie Mac to reflect the current economic climate and make mortgage credit more accessible. However, they maintain slightly different internal guidelines and flexibility in how much risk they are willing to accept, which affects individual borrowers differently based on their financial profiles.
It’s important to note that these ratios can fluctuate based on regulatory changes, market conditions, and revisions to each entity’s internal risk management strategies. Borrowers are encouraged to consult with lenders for the most accurate and up-to-date information applicable to their circumstances.
Fannie Versus Freddie Agency Mortgage Guidelines
The difference between Fannie Mae and Freddie Mac is evident in their unique agency guidelines. Suppose a lender needs to receive automated approval from Fannie Mae’s Desktop Underwriter (DU). In that case, they can alternatively submit the loan application to Freddie Mac’s Loan Prospector (LP), Freddie Mac’s automated underwriting system (AUS). This process could result in an automated approval based on Freddie Mac’s LP findings.
What Are The Differences Between Fannie Mae and Freddie Mac’s Automated Underwriting System?
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.
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. Click Here To Find A Mortgage For FHA Loans
FAQ: Difference Between Fannie Mae And Freddie Mac
1. What are Fannie Mae and Freddie Mac? FNMA (Fannie Mae) and FHLMC (Freddie Mac) acquire mortgages from lenders and transform them into mortgage-backed securities, contributing to the mortgage market’s stability, affordability, and liquidity.
2. Why are they called Fannie Mae and Freddie Mac? These names are informal nicknames derived from their acronyms: FNMA (Fannie Mae) and FHLMC (Freddie Mac). These were created to make the organizations’ names more relatable and easier to remember.
3. What is the main difference between Fannie Mae and Freddie Mac in mortgage lending? While both entities purchase mortgages, most lenders use Fannie Mae, and its underwriting guidelines might differ slightly from Freddie Mac’s. For instance, if a borrower doesn’t meet Fannie Mae’s criteria, lenders might turn to Freddie Mac, which can have slightly more lenient standards in certain areas.
4. How do Fannie Mae and Freddie Mac affect the application process? They both operate automated underwriting systems (AUS) — Fannie Mae uses Desktop Underwriter (DU), and Freddie Mac uses Loan Prospector (LP). These systems help determine if a mortgage is approved based on the agencies’ guidelines. Differences in their acceptance criteria can lead to one agency approving a loan that the other might not.
5. What are the Debt-to-Income (DTI) ratio requirements for Fannie Mae and Freddie Mac? Fannie Mae typically allows a DTI of up to 36%, which can be extended to 50% with compensating factors like higher credit scores or larger reserves. Freddie Mac generally permits up to 45%, potentially extending to 50% with similar compensating factors. These requirements can vary based on overall market and economic conditions.
6. Do all lenders offer both Fannie Mae and Freddie Mac loans? Not all lenders handle both Fannie Mae and Freddie Mac loans. Some specialize in one or the other, influencing the loan options available to borrowers.
7. What makes Freddie Mac more lenient in certain scenarios? Freddie Mac may be more accommodating for borrowers with lower credit scores, higher DTI ratios, or limited credit history. It is also less restrictive about gift funds as part of mortgage applications, which can be crucial for some borrowers.
8. How do Fannie Mae and Freddie Mac handle credit report errors differently? In some cases, a mortgage that Fannie Mae would deny may be approved by Freddie Mac due to factors such as errors in the credit report. This is especially important when a credit tradeline incorrectly shows as active after a bankruptcy.
9. Can Fannie Mae and Freddie Mac’s guidelines change? Their policies and guidelines can be updated to reflect current economic conditions and other factors. Borrowers must consult with lenders for the most recent information relevant to their circumstances.
10. Where can I learn more about specific mortgage products Fannie Mae and Freddie Mac offer? You can visit the official websites of Fannie Mae and Freddie Mac or consult with a mortgage professional to learn more about specific products, such as low down payment options and different mortgage products tailored to various borrower needs.
If you have any questions about the Difference Between Fannie Mae And Freddie Mac or you need to qualify for loans with a lender with no overlays on government or conforming loans, please contact us at Gustan Cho Associates at 800-900-8569. Text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
Related> Fannie Mae offers 3% down payment mortgages
This blog about the Difference Between Fannie Mae And Freddie Mac was updated on April 15th, 2024.
This is an unrelated question. How long following an investment property short sale must one wait before they can refinance a commercial loan? Thank you.
Investment properties are not conforming loans and do not fall into the waiting period guidelines for Fannie Mae and Freddie Mac. As long as you have a good letter of explanation, you should not have a waiting period after a short sale on a commercial property, especially if the commercial loan was a non-recourse loan. Depending on the commercial lender, there may be waiting period after a short sale on commercial loans, however, most commercial loans are portfolio loans where the lender will hold the loan in their portfolio.