If you’re like 50 percent of Americans with a home loan, your mortgage likely isn’t owned by a bank or a lender anymore. In fact they’re probably owned by two companies that are backed by the federal government. These government-sponsored enterprises (GSEs) are more commonly known as Fannie Mae and Freddie Mac.
Fannie Mae is the colloquial name for the Washington D.C.-based Federal National Mortgage Association (FNMA). Freddie Mac is the similar industry slang for the Federal Home Loan Mortgage Corp. (FHLMC) that’s based in Reston, Virginia.
You’ve probably heard of Fannie and Freddie, but they aren’t the only mortgage-buying GSEs backed by the Feds. Ginnie Mae, the Government National Mortgage Association, backs loans from the Federal Housing Administration’s lenders, as well as the Veterans Administration, or VA.
Even the U.S. Department of Agriculture’s Federal Agricultural Mortgage Corporation, or. Farmer Mac, gets in on the act and backs home loans. (More on how Farmer Mac can help you get a home loan even if you don’t own a cow or a combine a little later.)
All told, the GSEs hold about $5 trillion worth of home mortgages, according to the Federal Reserve.
Meet the ‘family’
Now here’s how Fannie, Freddie and Ginnie (and Mac the farmer) help you get a home loan. None of them actually make loans, but what they do is buy home loans from banks and others lenders, so long as they meet certain creditworthiness standards and are within a certain amount.
What that does for banks is they can move loans off their books and not carry the risk of a borrower defaulting on a loan, meaning they’re free to make more loans to more borrowers, especially middle class and first-time homeowners.
What’s the buyer benefit?
How does that help you? Well, first, as above, it increases the amount of loans a bank can make with its capital. More loans mean more people can qualify for a mortgage. Second it helps keep interest rates low because the bank doesn’t have to charge higher rates to insure its risk of default. That helps people with lower credit scores still get competitive interest rates.
But where your Fannie and Freddie help the most is by lowering the amount of down payments. Banks prefer borrowers naturally who put down larger down payments. It’s an indication that the borrower has invested in the home and won’t walk away. But with Fannie and Freddie willing to assume the risk, banks can require lower down payments. For example, Fannie Mae and Freddie Mac are now buying mortgages will as little as 3 percent down.
FHA-backed loans require only a 3.5 percent down payment and lower credit scores will still qualify.
Other options available
With Ginnie Mae backing VA Loans, veterans and service members can buy homes with little or even no down payment.
Even if you have no aspirations to be Old MacDonald, you still might be eligible for 100-percent financing through the U.S. Department of Agriculture (USDA) if you are buying in a rural community. There are many suburban areas that are also eligible, so check the link above to run an address for USDA loan eligibility.
Published Feb. 28, 2018
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