The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are both major players in the mortgage world, but neither organization’s name rolls smoothly off the tongue. That might be why they’re generally referred to as Fannie Mae and Freddie Mac, respectively. While they’ve embraced light and friendly nicknames, don’t be fooled. These entities have significant power in the financial sector. If you’re interested in using a home loan to purchase a property, understanding the difference between Fannie Mae and Freddie Mac can help you sort through your options and choose the best loan product for your circumstances.
Understanding the Difference Between Fannie Mae and Freddie Mac
NerdWallet describes Fannie Mae and Freddie Mac as “the financial fuel that power the mortgage loan industry.” Both are government-sponsored enterprises that were created by Congress. Both are subjected to the oversight of the Federal Housing Finance Agency and tasked with injecting liquidity into the mortgage market while also enhancing its stability. Both work toward their goals by buying mortgages from lenders, providing lenders with fresh cash that they can use for new loans. In turn, Fannie Mae and Freddie Mac either hold onto the loans that they purchased or package and resell them to investors, fueling the secondary mortgage market.
With such strong similarities, it is no wonder that Fannie Mae and Freddie Mac are often paired together, but they do have distinct differences. What sets them apart?
As Investopedia reports, Fannie Mae was born in 1938. The Great Depression had shattered the U.S. economy. Nearly 25 percent of American homeowners had lost their homes to foreclosure, banks lacked funds to lend for new home loans, and a housing crisis was looming. In response, Congress created Fannie Mae to be a reliable, steady source of funding for housing. The organization dominated the secondary mortgage market until Congress privatized the company, transforming it into a publicly traded company in 1968. Congress chartered Freddie Mac as a publicly traded company two years later in 1970 in order to create more competition in the secondary mortgage market. While Fannie Mae and Freddie Mac share the same basic goals, they are actually competitors for mortgage business.
Both Fannie Mae and Freddie Mac limit their purchases to loans that conform to the standards that they set. In fact, their standards are the basis for conforming loans. However, as The Mortgage Reports notes, their standards aren’t identical. Differences in credit history, debt levels, current income, and other aspects of a borrower’s financial profile might mean that they qualify for a loan backed by one agency while missing the cutoff for one backed by the other.
Fannie Mae and Freddie Mac both shop for conforming loans, but they tend to favor different sources. According to The Balance, Fannie Mae typically deals with large, commercial banks. Meanwhile, Freddie Mac does more purchasing from smaller entities.
Their Loan Programs
Fannie Mae and Freddie Mac offer different loan programs for aspiring homebuyers with tight budgets. Fannie Mae’s HomeReady loan is designed to serve low-income homebuyers with credit scores of 620 or higher and limited down payments. Meanwhile, the Freddie Mac Home Possible loan program is aimed at low- and moderate-income borrowers who need flexibility and a low down payment requirement.
Ultimately, lenders prefer to make loans that meet the standards set by Fannie Mae and Freddie Mac. After all, these loans are not only less risky but also a reliable source of liquidity since they’re easier to sell on the secondary mortgage market. As a result, borrowers who know a bit about these organizations and how they work will be better prepared to understand the impact that they have and what it means for their own loan options.
If you have questions about the difference between Fannie Mae and Freddie Mac, what it means to be a first-time homebuyer, how interest rates impact your mortgage’s cost, or any other home loan topic, turn to PrimeLending Twin Cities. Our loan experts would be happy to educate you about home loan programs and help you identify the best option for your unique needs. How can we help you? Contact us today to find out.