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Fannie Mac & Freddie Mac Rules: What Are the Major Differences?

written by: •edited by: Donna Cosmato•updated: 8/5/2011

Freddie Mac was originally created by Congress in 1970 as a private corporation. One of the reasons for the charter was to provide competition for Fannie Mae. They work in two separate markets - FNMA works with many lenders and banks while FMAC works mainly with thrifts (e.g. savings and loans).

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    Freddie Mac and Fannie Mae Charters

    home sold Both Freddie Mac and Fannie Mae were chartered by Congress as a way of adding liquidity to the housing market. Both programs enable banks to leverage their mortgage investments through insurance plans. Both companies are "government sponsored enterprise" or GSE.

    Both companies purchase mortgages, package them and then sell them on the open market as government backed securities. Both FNMA and FMAC help add liquidity to the housing market. Fannie Mae primarily buys mortgages from banks while Freddie Mac guarantees loans from savings institutions. Neither of them are loan programs, instead they are insurance programs that help make homes affordable and keep the mortgage markets liquid. Both programs are restricted to US home loans.

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    Differences in Rules

    The primary difference between Freddie Mac and Fannie Mae home loan guarantees is for those who own more than one property. Fannie Mae allows borrowers who own multiple properties up to ten (10) units while Freddie Mac allows borrowers no more than four (4) units.

    Another significant rule difference is the amount of money that a borrower must have on hand when they are requesting financing on a non-owner occupied property. While Fannie Mae rules allow as little as two months reserve on hand, Freddie Mac requires that any property after the initial owner occupied property have a minimum of six-month reserves on hand. This can make a significant difference for borrowers who have invested in non-owner occupied properties (for example, investment properties).

    There is also a difference between Freddie Mac and Fannie Mae rules regarding down-payment options. While Fannie Mae allows borrowers to put down as little as three (3) percent, Freddie Mac does not allow loans of more than 95 percent loan to value, which means at a minimum that a borrower must have five (5) percent down payment. Both Fannie Mae and Freddie Mac allow for special gifts, grants and other programs that can help lower the amount of the down payment for borrowers, especially those who meet the credit criteria for loans.

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    Freddie Mac, Fannie Mae and Affordability

    Fannie Mae and Freddie Mac rules are designed to help make homes affordable. Both are chartered to provide liquidity to the housing market by purchasing loans from lending institutions, insuring them and reselling the resulting securities in the secondary market. Since both companies are publicly traded (though Freddie Mac is currently in receivership) they both help provide liquidity in the lending market.

    Fannie Mae and Freddie Mac loan guarantees should not be confused with FHA loans. They do not offer similar products. The FHA (Federal Housing Administration) actually makes loans directly while FNMA and FMAC do not. GNMA (Ginnie Mae) also makes direct loans. None of these programs automatically disqualify you if you have had credit problems, although you may be required to make a larger down payment or pay a higher interest rate.

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    Understanding Your Options

    Once you have decided to purchase a home, it is important that you understand the financing options that are available to you. Both FNMA and FMAC offer first time home buyers education programs that will help you understand the various programs that are available to you. Shopping around for a mortgage rate will help you decide which mortgage is right for you as well. Understanding the difference between Fannie Mae and Freddie Mac loan guarantee programs can be confusing. However, most lenders will be able to help you decide when purchasing a home or refinancing which program works best for you.

References

  • Home Sold Author Feverpitched purchased via istockphoto.com
  • Ginnie Mae Mortgage Backed Securities http://www.ginniemae.gov/
  • Freddie Mac Home Ownership http://www.freddiemac.com/
  • Fannie Mae Home Path http://www.fanniemae.com/kb/index?page=home

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There are many considerations that one must make in order to purchase a home. These articles cover title insurance, personal mortgage insurance and investment property information that can help you decide what is right for you.
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