Like peanut butter and jelly or salt and pepper, Fannie Mae and Freddie Mac are seldom not spoken of in the same sentence. Both created by the U.S. Congress, they provide liquidity, stability and affordability to the mortgage market. This means readily accessible funding to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.
Fannie Mae and Freddie Mac buy mortgages from lenders and do one of two things. They hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Mortgage companies then use the cash from the sale of these mortgages to offer additional lending. But as much as Fannie Mae and Freddie Mac are similar, they are not the same. Up next are some key differences between these important financial institutions.
The U.S. government chartered Fannie Mae in 1938 — near the end of the Great Depression — to help ensure a reliable and affordable supply of mortgage funds throughout the country. Today, it is a shareholder-owned company that operates under a congressional charter. Freddie Mac came along more than three decades later, in 1970. Part of the Emergency Home Finance Act, lawmakers passed Freddie to expand the secondary mortgage market and reduce interest rate risk for banks.
Lending Standards and Practices
Loans purchased by Fannie Mae and Freddie Mac are conventional loans, aka “conforming conventional loans.” This means they are not created by a government entity. Rather, they simply “conform” to the guidelines put in place by Fannie and Freddie. While these guidelines have some similarities, they are not the same. For example, it’s possible for a borrower to be approved for a loan insured by one and not the other.
Also, to obtain a Fannie Mae loan, a borrower can’t have an annual income that exceeds 80% of his or her area’s median income. By contrast, Freddie Mac loans require that applicants not make more than their area’s average income. The best plan is to work with a lender like Fairway of the Carolinas that offers conventional loan programs that follow the guidance of both Fannie Mae and Freddie Mac. We can run your financial profile through both to find which is the best fit for you!
The Big One
Now for the last but perhaps most notable difference between Freddie Mac and Fannie Mae. In short: They don’t buy mortgages from the same places. While Fannie purchases from large lenders, Freddie tends to do business with much smaller financial institutions. Click here to learn more about both Fannie and Freddie.
Regardless of whether your mortgage aligns more closely with Freddie Mac or Fannie Mae standards, Fairway of the Carolinas is the lender for you. Contact us today with any questions about homebuying or refinancing. With the market this hot, there’s no time to lose. We look forward to hearing from you soon!