If you are interested in applying for a Fannie Mae mortgage, you should know that this famous name in mortgages does not itself lend money to borrowers.
Fannie Mae is the commonly used nickname for the Federal National Mortgage Association (FNMA), and what it does is purchase qualifying mortgages from lenders in the secondary mortgage market. Fannie Mae is what is called a government-sponsored enterprise (GSE), which was created in 1938 by Congress, to revitalize the housing market which had been destroyed by the Great Depression. Fannie Mae mortgages have allowed millions of Americans to own their own homes, and they are the largest backer of 30-year fixed-rate home loans.
Fannie Mae is successful because it invests in the mortgage market, which creates more liquid assets for the lenders. The lenders then have the resources to underwrite, or provide the funds for, a larger number of mortgages. And this, in turn, makes mortgages more easily available to potential home buyers.
If you want to obtain a Fannie Mae mortgage, you will be required to use a lender that has GSE approval. There are eligibility requirements which must be met by all approved lenders, which include not participating in sub-prime lending. Sub-prime mortgages are offered to buyers with low credit scores. Lenders consider them high risk, so they are required to pay high interest rates on their loans.
If a mortgage meets the requirements, and is purchased by Fannie Mae, it is called a conforming loan. A Fannie Mae mortgage must also fall under the limits set by the Federal Housing Finance Agency (FHFA). In most areas of the United States, the limit for a conventional home loan is $417,000. In areas with a high cost of living, the limit is $625,000.
Fannie Mae cannot back loans that exceed these limits, and these loans, called jumbo loans or non-conforming loans, have higher interest rates than conforming loans.
How to Apply
After you have found an eligible lender, you can apply for your Fannie Mae mortgage. You will be required to supply this information during the process:
- Credit History– This includes not only your credit score, but also your credit history, payment history, and the total amount of your outstanding debts.
- Savings– You will be expected to prove that you can provide the required down payment and closing costs.
- Income– You will need proof of all income, including, but not limited to, employment, child support, rental properties, pensions, and investments.
- Work History– You will be required to show a stable work history for at least two years. There are exceptions for members of the military, retired people, and recent graduates.
Your Debt-to-Income Ratio
Your debt-to-income ratio is determined by what percentage of your income goes to pay for housing. To qualify for a Fannie Mae mortgage, your debt-to-income ratio cannot be greater than 28 percent. Those buyers who find that their debt-to-income ratio is too high can increase the down payment they make on their home, which will reduce the amount they need to borrow. The minimum down payment Fannie Mae mortgages require is 5 percent for a fixed-rate loan, but 20 percent down payments are considered ideal.
Credit Score Requirements
Would-be home buyers must meet certain credit score requirements in order to qualify for a Fannie Mae mortgage. Your credit score is also called your FICO score, which stands for Fair Isaac Corporation, the company which created the score. FICO scores are determined by an algorithm that takes into account the amount of debt you carry, your payment history, your credit history, the types of credit you use, and new credit you obtain. All these factors determine the risk you pose to lenders. The lowest possible score is 300, while the highest possible score is 850.
To qualify for a Fannie Mae mortgage, you must have a credit score of at least 620. The higher your credit score is, the more easily you can obtain lower interest rates. According to the records at Fannie Mae, the average credit score of their borrowers in 2013 was 744.
To Wrap Things Up
Since 2009, Fannie Mae mortgages have facilitated the purchase of 4.1 million homes. A mortgage backed by Fannie Mae may be right for you, if you meet the requirements. If you have a high credit score, a good debt-to-income ratio, and a large enough down payment, a Fannie Mae mortgage is probably your best choice, because the interest rates are significantly lower than those for non-conforming loans.