If you wish to apply for a Fannie Mae loan you would be taken aback to know that the mortgage giant does not deal directly with borrowers.
Fannie Mae is a popular name for The Federal National Mortgage Association (FNMA), which buys and guarantees loans through the secondary mortgage market. Established in 1938 during the Great Depression by Congress in order to stimulate the housing market, this government-sponsored enterprise (GSE) plays a vital role in promoting home-ownership. It is the biggest funder of fixed-rate 30-year mortgages.
Fannie Mae, through investment in the mortgage market, ensures creation of more liquidity for lenders like credit unions, banks and thrifts. This enables them to fund or underwrite more mortgages, thereby enhancing availability to borrowers.
For obtaining a loan backed by Fannie Mae, you need to move ahead via a GSE approved lender. The lenders must possess the eligibility as well as underwriting criteria which guarantees the loan’s credit quality. This incorporates not being a part of any unscrupulous subprime lending practices. Subprime loans are given to borrowers who have poor credit and who are regarded to be a greater risk by the lender. These loans come with higher interest rates compared to prime rate loans.
Mortgages purchased as well as guaranteed by Fannie Mae should meet its guidelines. These are then known as conforming loans. In 2014, for a single-family home, the conventional loan limit is $417,000 for most areas while for high-cost areas like Alaska and Hawaii, it is $625,000.
Application for a loan
Once you come across a lender having the eligibility for issuing a Fannie Mae-backed loan, they will provide assistance in filling a Uniform Residential Loan Application. You would be required to collect and render financial information and documentation, including records and statements of income and employment.
Ratio of Debt to Income
It is good to have a front-end DTI (Debt-to-Income Ratio) of less than or equal to 28% for being approved for a Fannie Mae-backed loan. The portion of your gross income which is utilized in housing costs can be determined by a front-end DTI. An excessively high DTI requires a larger down payment for reducing the monthly costs. A bare minimum of 5% down payment is required for a fixed-rate mortgage; however 20% is preferable.
Home buyers need to fulfill minimum credit requirements for becoming eligible for mortgages backed by Fannie Mae. In case of a single-family home which is a primary residence, a minimum of 620 FICO (Fair Isaac Corporation) score is required for fixed-rate loans while 640 is the requirement for adjustable-rate mortgages (ARMs).
The Bottom Line
Since the year 2009, Fannie Mae has been providing $4.2 trillion in the form of mortgage credit, which has enabled 4.1 million home purchases. In case your credit is fine and you meet the requirements of Fannie Mae and are also eligible to obtain a conforming loan, there is high probability that you would be receiving lower interest rate as compared to a jumbo or a non-conforming loan.