The Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae, was created in 1938 to provide support and stability to the housing market during a difficult financial time. It provided a long-term, predictable mortgage with low interest rates. This made purchasing a home possible for first-time home buyers and moderate-income households across the U.S. Today, homebuyers can purchase various types of homes with a loan backed by Fannie Mae. From apartments and condos to single-family homes, homebuyers can find affordable housing.
If you are looking to purchase your dream home with a mortgage loan backed by the FNMA, you will need to meet income eligibility requirements. Due to the program backing millions of home loans, borrowers should not be seen as high risk and lending companies must adhere to a strict selling guide. If you meet these qualifications, the process of applying for a loan should be fairly simple. Read the following sections below to learn more about Fannie Mae and the application process.
What is Fannie Mae?
Before Fannie Mae was established, homebuyers would finance their homes with private companies. It was not until the Great Depression of the 1920s that people began to recognize the need for a reliable and durable source of funding in the housing market. From what had started as the stock market crash in 1929, ended with millions of foreclosed homes across the country. Thus, the FNMA was established to provide liquidity and stability to the housing market by establishing a secondary mortgage market that would take mortgage loans off the books of banks and lending companies and sell them to investors.
Fannie Mae is a Government-Sponsored Enterprise (GSE), a privately held financial services corporation chartered and supported by the federal government. Before this GSE, home loans were typically short-lived, renewable loans with large balloon payments and high down payments, making it difficult for the average American to purchase a home. Fannie Mae introduced a new type of a loan that made the dream of owning home obtainable- the 30-year, fixed-rate mortgage loan. Homebuyers could now have a predictable and stable mortgage payment. Not only has the enterprise expanded the housing market, but it remains one of the leading sources of financing for mortgage lenders today.
How does Fannie Mae work?
Not to be confused with a primary lender, Fannie Mae guarantees, holds and sells home loans from lending companies to increase the liquid cash available to produce more mortgages. This way, lending companies can continue to distribute loans to qualifying homebuyers while remaining financially stable.
If a lending company keeps granting long-term loans to homebuyers, it could take years before its funds are replenished- 30 years to be exact for the conventional loan. Insufficient capital can make it difficult and nearly impossible for lending companies to continue to distribute loans.
Fortunately, the FNMA makes future lending possible by purchasing these loans immediately and removing them from their books. More specifically, the enterprise will purchase a mortgage, hold it or bundle it up with other mortgages and sell it in the form of mortgage-backed securities (MBS). These MBSs are purchased by a pool of big time investors, such as investment banks and insurance companies, who accrue profit by the interest-rates of borrowers.
Whether or not borrowers meet their mortgage payments, Fannie Mae guarantees that investors will receive their principal and interest-rate payments. Because of this, the GSE only purchases conventional or conforming loans that meet strict origination and underwriting guidelines. These loans do not exceed the maximum loan limit set for the year and typically have low interest-rates.
Integral Roles in the Secondary Mortgage Market
In order for the FNMA to function correctly, every role must play its part in the secondary mortgage market. These roles include borrowers, lenders, Fannie Mae and investors. Borrowers do not obtain mortgage loans directly from the GSE. In fact, the enterprise does not originate and distribute loans at all. Instead, it purchases qualifying loans from lending companies who originate unique loans for their clients. This is not to say that borrowers should not be concerned as to whether or not their mortgage loans will be bought by Fannie Mae.
Obtaining a mortgage loan from a Fannie Mae approved-lender ensures that the lending company creates high-quality loans for its borrowers and has not participated in any unethical lending practices. So, while lending companies serve as the middle man between Fannie Mae and borrowers, the FNMA is the middle man between lending companies and investors. If you are still wondering how all of these roles connect, take a look at the breakdown below:
- A borrower provides personal and financial information and documentation to his or her lending company. This may include income, assets, credit score and debt to income ratio.
- At this time, an underwriter will decide whether he or she believes the borrower qualifies for a Fannie Mae mortgage. If so, the lending company and borrower will submit an application.
- The FNMA reviews the application and determines whether the borrower and the loan originated meets the eligibility requirements and conventional loan requirements. If there are any issues with the loan, the GSE will notify the lending company. The loan must be adjusted appropriately, or it will be discontinued from the process.
- If the mortgage loan is approved, the securitization process will continue, and Fannie Mae will either hold the loan or purchase it and sell it in the form of a MBS.
- The lender will begin to service the mortgage, collecting payments from the borrower. While the lender keeps a servicing fee, it will send the principal and interest of the loan to Fannie Mae.
- Investors will then receive their principal and interest in the form of monthly payments passed by Fannie Mae through a trust.
Fannie Mae Eligibility Requirements
To qualify for a mortgage loan backed by the GSE, homebuyers and approved Fannie Mae lenders must meet strict eligibility requirements. Additionally, all loans backed by Fannie Mae must be conforming or conventional loans. Homebuyers must meet income requirements and loans originated must not exceed maximum loan limits based on local markets. This is to prevent the distribution of subprime or high-risk loans and unethical lending practices.
The enterprise will consider your income, debt and how many financial obligations you have to determine whether you are capable of paying your monthly mortgage payments on time. These expenses may include credit card payments, student loans and auto loan payments. According to the Fannie Mae selling guide, you will not qualify for a Fannie Mae-backed mortgage if your debt-to-income ratio exceeds 50 percent.
In addition to meeting this requirement, you generally must have a credit score of at least 620 to qualify for a fixed-rate mortgage or a 640 to qualify for an adjustable-rate mortgage. Your underwriter will take three different FICO scores and eliminate the highest and lowest score while considering the remaining score. Along with this score, your Fannie Mae will take into account your loan-to-value ratio to determine your proposed mortgage as a percentage of your home’s value. Fannie Mae lenders will prefer lower percentages because they present a lower risk. Furthermore, it is important to keep in mind that a lending company may have its own eligibility requirements in addition to those imposed by Fannie Mae.
Applying for a Fannie Mae loan
To apply for a Fannie Mae-backed mortgage loan, find a lending company approved by the GSE. Lenders may include banks, credit unions and small lending companies. Once you have found the right lender, you will need to complete a preliminary review. During the process, a skilled underwriter will sit down with you to go over your finances and the type of loan you will be able to achieve as far as down payment, monthly mortgage payments and interest rate.
Additionally, he or she will go over the advantages and disadvantages of a fixed-rate mortgage and adjustable-rate mortgage so that you can choose which one is best suited for you. Once the underwriter has determined whether you qualify for a loan backed by the enterprise, you will both submit a Fannie Mae loan application. You will need to provide financial information and documentation, such as proof of employment, gross income and monthly obligations.
These financial obligations typically include alimony, credit card payments, car payments and child support. Most Fannie Mae lenders use the GSE’s Desktop Underwriter to assess risk and determine whether or not the FNMA will back up a loan. You may receive an approval right away or it may take a while depending on whether your lending company has an additional underwriting process. Once you have been approved by your lending company and Fannie Mae, you can begin making your monthly mortgage payments.