The VA, the FHA, and the USDA aren’t the only government-supported mortgage options. The government also helps to stabilize the mortgage lending market and reduce risk with government sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac.
Fanne Mae and Freddie Mac are government-run entities that purchase qualifying mortgages from banks, package them together with other mortgages they purchased, and sell mortgage-backed securities to investors. That means they don’t create and lend their own loans. Instead, these entities help lenders by giving them more money with which to create more mortgages to offer to more people.
This may not seem totally related to helping you save money on buying a home, but it actually can help you get some of the most favorable rates on the market.
That’s because mortgage lenders are confident that the entities will buy these mortgages, so they’re able to offer mortgages with more flexible eligibility requirements, lower down payments, and assistance with down payments and closing costs.
Here are the general qualifications for a Freddie Mac or Fannie Mae loan:
- Credit score of at least 620
- Debt-to-income (DTI) ratio of less than 45%, but 36% or less is better
- Cash in the bank of at least twice the amount of your monthly mortgage payment
- Be able to pay at least 3% of the purchase price as the down payment
- Purchase a property that costs less than the limit for your local area
If your loan meets these criteria, you may be eligible for a Fannie Mae or Freddie Mac home loan, known as a conforming loan.
The Federal Housing Finance Agency (FHFA) sets borrowing limits for conforming loans. Fannie Mae and Freddie Mac mortgage rates can vary, depending on the state and area in which you live as well as whether the house is a single-unit or multi-family unit. For 2023, the FHFA increased the conforming loan limit to $726,200.
However, if you’re purchasing a home in a high-cost area, you may be able to get a loan that is 150% of the baseline limit. This figure can change every year based on growing costs of housing in the U.S. and other factors, like the effects of the COVID-19 pandemic.
Most lenders offer Fannie Mae and Freddie Mac conforming loans, but always ask when reviewing options with lenders. You can also use special search tools like Fannie Mae Homepath and My Home by Freddie Mac that help you find properties in your desired area. You may even find a Fannie Mae Homepath property first and then find a lender with which you can submit a Fannie Mae home loan application.