Which Government Finance Program Should You Get
There is no one perfect mortgage for every borrower. All of us have different financial circumstances and both of these government mortgage programs provide competitive home financing. Generally, FHA backed loans have a lower credit score requirement and a low-down payment. They are often the best choice for borrowers with the lowest credit scores. FHA does require more expensive mortgage insurance, which is a negative. But on the plus side, it allows the low credit borrower to get a low-interest rate at or below market rates. Qualifying for a home loan with bad credit and no money down is not going to happen with Fannie or FHA as they will need at least a 3% down-payment, but below-average credit scores are allowed if the applicant can check the other lending boxes.
FHA financing is also a good fit for first-time house buyers who are getting their down payment as a gift from a relative.
Fannie Mae has higher credit standards, but if you can qualify, you can have a higher debt to income ratio and still get approved. Fannie Mae also has low down payment options. It also has mortgage insurance requirements for less than 20% down loans, but it is cheaper than FHA mortgage insurance.
Fannie Mae Conforming Loan Limits
The FHFA sets requirements for Fannie Mae called conforming loan limits. These mortgage loans, known as conforming mortgages, are guaranteed by Fannie Mae. This means theyll make investors whole if the borrower goes into default. Fannie Mae packages these loans into mortgage-backed securities before selling them on the open bond market to investors.
An MBS might consist of 1,000 loans or more that have similar characteristics. Fannie Mae has certain rules, among them that they wont buy nonconforming loans. Many components can make a loan nonconforming, but one of the most common characteristics is jumbo loan status, which for 2022 is any loan above $647,200 for single-family homes.
What Should We Do With Fannie And Freddie
With the federal government backing nearly every home loan made in the country today, almost everyone agrees that the current level of support is unsustainable in the long run, and private capital will eventually have to assume more risk in the mortgage market. That leaves two critical questions before policymakers today: What sort of presence should the federal government have in the future housing market, and how do we transition responsibly to this new system of housing finance?
Since the conservatorship of Fannie and Freddie began, dozens of advocacy groups, academics, and industry stakeholders have offered possible answers to these questions. The overwhelming majority of these suggested plans agree that some form of government support is necessary to ensure a stable housing market and to maintain the 30-year fixed-rate mortgage.
In January 2011 the Mortgage Finance Working Groupa progressive group of housing finance experts, affordable housing advocates, and leading academics sponsored by the Center for American Progressreleased its plan for responsibly winding down Fannie Mae and Freddie Mac and bringing private capital back into the U.S. mortgage market. Our proposal includes an explicit government backstop on certain mortgage products, requirements that private firms serve the whole market, and an empowered regulator to ensure the sustainability and affordability of mortgage products. The plan also lays out five guiding principles for any reform effort:
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What Maintenance Does Fannie Mae Perform On Homepath Homes
To keep the properties marketable, Fannie Mae performs essential services on its foreclosed and repossessed properties. Services include winterization, removal of trash and debris, repair of safety hazards, and basic interior cleaning.
Fannie Mae may also provide:
- Gutter and fence repairs.
- Painting over graffiti.
When To Choose A Homepath Property
Fannie Mae HomePath is available to first-time home buyers, repeat home buyers and real estate investors. There are no special financing requirements, and buyers can secure an automatic $500 closing cost credit for mortgaging via a conventional Fannie Mae home loan.
With a low down payment HomeReady mortgage, first-time buyers can use HomePath to buy homes with discounted rates, closing costs, and mortgage insurance.
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Are Homepath Homes A Good Deal
HomePath homes can be a good deal for home buyers. However, they wont meet everyones home-buying goals. Heres why:
HomePath homes are foreclosure properties. They are homes that the government repossessed to re-sell to the public at a discount.
Buying foreclosed homes is different from purchasing non-distressed homes and new construction properties. HomePath buyers may face some or all of the following:
- Sales may not close as quickly as non-HomePath homes
- Homes may be defective and not in move-in ready condition
- Homes may not be for sale in your preferred area
- Homes may not be available in your price range
- Homes may require costly repairs
In addition, Fannie Mae restricts how HomePath sales contracts get written. It does not accept offers for HomePath properties contingent on the sale of a prior home, and buyers must purchase HomePath as-is.
If you can be comfortable with these conditions and find a good listing, buying a HomePath home can be a good deal.
Get pre-approved for a mortgage today.
Down Payment And Loan
The down payment requirements are the same as with other Fannie Mae loans. You can put down as little as 3% on a single-family home if you qualify for the HomeReady program. Otherwise, youll need to put down at least 5%.
The key difference with a HomeStyle Renovation loan down payment is youre going to be putting down a percentage of the purchase price plus the renovation costs, or a percentage of the homes post-renovation value, not just a percentage of the purchase price. The down payment is based on how much youre borrowing, not how much the home is currently worth.
Here are the down payment requirements by property type:
- One-unit home : 3% or 5%
- Triplex or quadruplex: 25%
- Second home: 10%
- Investment home: 15% , 25%
If you put down less than 20%, you will have to pay for private mortgage insurance until you accumulate 20% equity through paying down your loan and/or home price appreciation.
If you cant afford any down payment, you might be eligible for the Community Seconds program. Federal, state and local nonprofits, as well as some employers, offer down payment assistance in the form of a small, second mortgage that can cover a down payment of up to 5%.
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Driving The Future Of Affordable Housing
True to our mission and our Duty to Serve, were leading the way in providing access to affordable housing across America. Were supporting sustainable homeownership and healthy, safe rental communities and working with stakeholders to improve the housing finance system.
In the countrys key overlooked markets manufactured housing, affordable housing preservation, and rural housing our innovative solutions are helping more and more families achieve the dream of a stable, affordable place to call home.
How To Buy A Homepath Property
Buying a Fannie Mae-owned HomePath home differs from buying an ordinary home or a new construction property. Buyers must follow a standardized process for Fannie Mae, which helps the agency sell more foreclosed properties to buyers more quickly.
Here are the five steps for buying a Fannie Mae HomePath home.
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Fannie Mae Guidelines If You Cant Afford Your Mortgage Payments
If hard financial times hit, lenders must follow Fannie Mae guidelines to help you find solutions to avoid foreclosure. Fannie Mae also offers programs for borrowers who owe more than their home is worth, known as underwater mortgages. Options may include:
Loan modifications. If you fall behind on payments or experience a sudden loss or drop in income, you can apply for a mortgage modification. Your loan servicer will work with you to come up with a short-term or permanent solution, such as lowering your rate, extending your term or reducing the balance you owe to make your mortgage more affordable.
Forbearance. A mortgage forbearance allows you temporarily stop making payments and negotiate how and when youll make up for missed payments. There are several ways to pay back the paused payment. Fannie Mae forbearance repayment guidelines allow you to:
- Spread the repayment period out over time with higher monthly payments
- Add the unpaid balance to the end of your loan
- Pay the entire balance in a lump sum if you have the resources
Underwater refinance programs. If your home is worth less than your loan balance and you currently have a Fannie Mae loan, you may be able to lower your payment with a HARP replacement loan. In many cases, an appraisal isnt required and you may not need as much financial paperwork to qualify.
Refinance Option For 97% Ltv/cltv/hcltv
|97% LTV Standard
|Limited Cash-Out Refinance for transactions underwritten using DU when the mortgage being refinanced is owned or guaranteed by Fannie Mae
The lender must document that the existing loan is owned by Fannie Mae.
Documentation may come from the lenders servicing system, the current servicer , Fannie Maes Loan Lookup tool, or another source confirmed by the lender. All other standard limited cash-out refinance policies apply.
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Creating Opportunities In Rural Markets
To meet the unique needs of rural markets, were working with local and regional stakeholders to ensure that housing opportunities, financing products, and secondary market support operate in tandem. Together, were creating better options for homeowners and renters alike.
View the comprehensive 2022-24 plan and specific sections:
Down Payment And Closing Cost Assistance
Fannie Mae is making it easier to offer Down Payment Assistance
Fannie Mae has updated policies to make down payment more accessible to borrowers:
- We have expanded eligible down payment gift donors to include relatives of domestic partners, former relatives and godparents. Learn more in the .
- We now allow lenders to offer grants to assist borrowers with their down payments, provided the grants meet certain conditions. Learn more in the .
Low down payment mortgages are a great solution for helping borrowers achieve homeownership, but for some borrowers, finding even a 3% down payment can be a challenge. Fortunately, in many cases, Fannie Mae allows funds for part or all of a down payment and closing costs to come from a variety of sources, helping more borrowers achieve the dream of homeownership.
Fannie Mae allows three primary sources of closing cost and down payment assistance: Gifts, grants, and Community Seconds®.
Gifts and Grants
Gifts and grants can come from a variety of sources and can help borrowers defray upfront costs:
For details and documentation requirements, see:
- Selling Guide section B3-4.3-06 .
Community Seconds mortgages can come from many of the same sources as grants, but a second lien or other document is placed on the property to enforce compliance with it. Although Fannie Mae does not purchase Community Seconds, it does purchase first mortgages associated with Community Seconds.
Benefits of Community Seconds include:
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Fannie Mae Loan Requirements
To do business with Fannie Mae, a mortgage lender must comply with the Statement on Subprime Lending issued by the federal government. The statement addresses several risks associated with subprime loans, such as low introductory rates followed by a higher variable rate, very high limits on how much an interest rate may increase, limited to no borrower income documentation, and product features that make frequent refinancing of the loan likely.
The mortgages that Fannie Mae purchases and guarantees must meet strict criteria. The limit, for example, for a conventional loan for a single-family home in 2022 is $647,200 for most areas and $970,800 for high-cost areas, including Hawaii and Alaska. The FHFA sets these limits.
To obtain a loan backed by Fannie Mae, youll have to go through an approved lender. Along with avoiding subprime loans mentioned above, lenders must meet eligibility and underwriting criteria that ensure the credit quality of the financing.
Mortgages purchased and guaranteed by Fannie Mae are called conforming loans. Generally speaking, conforming loans have lower interest rates than non-conforming loans or jumbo loans, which are typically not backed by Fannie Mae because they exceed the loan size limits.
Can Home Buyers Negotiate The Price For A Homepath Property
Yes, home buyers can negotiate prices on Fannie Mae HomePath properties within a small range. Buyers should not expect to lowball a HomePath property for sale. A well-negotiated price should indicate why the offered price is lower using nearby, comparable homes. Buyers must submit purchase offers via the HomePath website. Fannie Mae permits buyers to revise their offers until the stated purchase offer deadline.
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The Freddie Mac Home Possible Mortgage
Freddie Macs Home Possible Mortgage is very similar to Fannie Maes Home Ready.
- Income limits are set at 80% of the local median
- Boarder income can be counted on your application if the renter has lived with you for at least one year
- The full down payment and closing costs can come from gift funds or down payment assistance
A key difference: Freddie Mac will count only rental income toward your application. The income of other household occupants, like family members and roommates, cant help with qualifying for the loan.
Like Fannie Mae, Freddie Mac allows borrowers to purchase a 2- to 4-unit property with 3% down, as long as the homeowner lives in one of the units full time.
Alternatives To The Homeready Mortgage
HomeReady is one of 7 government-backed, low down payment mortgage loans. With its lower credit score requirements and flexible income guidelines, HomeReady favors first-time buyers.
However, HomeReady isnt suitable for everyone.
If you decide that HomeReady is non-optimal or unavailable to you, here are other low down payment mortgage options for first-time home buyers:
- Home Possible: A 3% down payment mortgage from Freddie Mac. Similar to HomeReady but enforces different credit score and income standards.
- Conventional 97: A 3% down payment mortgage for 1-unit homes backed by Fannie Mae and Freddie Mac. Best for buyers with higher credit scores and income.
- FHA mortgage: 3.5% down payment mortgage backed by the Federal Housing Administration. Best for buyers with lower credit scores and buyers of multi-unit homes.
- USDA mortgage: 100% mortgage backed by the U.S. Department of Agriculture. Available in lower-density areas to home buyers with modest income and average credit scores.
- VA mortgage: 100% mortgage backed by the Department of Veterans Affairs, Available to active-duty military members, veterans, and surviving spouses. Average credit scores required.
- HomePath®: A Fannie Mae low down payment program for buyers of foreclosed and repossessed homes.
Also, as a first-time buyer, you may qualify for federal home buyer tax credits and local down payment assistance. Get pre-approved to check your eligibility.
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What Are Fannie Mae Loans
Fannie Mae loans are mortgages backed by the Federal National Mortgage Association. This government-sponsored enterprise offers a few different types of home loans, including the HomeReady loan and the MH Advantage Mortgage.
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Hire A Real Estate Agent To Represent Your Offer
Fannie Mae requires that home buyers submit offers for HomePath foreclosed properties through its HomePath website via a real estate agent. Home buyers may not represent themselves. Its good practice to hire a real estate agent with experience negotiating HomePath offers and who does not also represent the seller, Fannie Mae.
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Accepts Nontraditional Income Sources
If you don’t have a traditional job, such one with a W-2 form, don’t worryyou can still qualify for a Fannie Mae loan. Fannie Mae accepts nontraditional income sources, like alimony, long-term disability income, and public assistance.
Of course, youll have to provide documentation to verify your income so the lender can see that you have enough money coming in to make your monthly mortgage payment.
What Do Fannie Mae And Freddie Mac Do
The primary function of Fannie Mae and Freddie Mac is to provide liquidity to the nations mortgage finance system. Fannie and Freddie purchase home loans made by private firms , package those loans into mortgage-backed securities, and guarantee the timely payment of principal and interest on those securities to outside investors. Fannie and Freddie also hold some home loans and mortgage securities in their own investment portfolios.
Since mortgage lenders dont have to hold these loans on their balance sheets, they have more capital available to make loans to other creditworthy borrowers. Lenders also have an added incentive to offer safe and sustainable productsnamely long-term, fixed-rate mortgagesbecause they know Fannie and Freddie will likely purchase them. Since Fannie and Freddie guarantee payments in the event of a defaultfor a fee, of courseinvestors dont have to worry about credit risk, which makes mortgages a particularly attractive investment.
Under this system, mortgage credit was continuously available well into the late-1990s under terms and at prices that put sustainable homeownership within reach for most American families. By the end of that decade, however, Wall Street had figured out how to purchase and securitize mortgages without needing Fannie and Freddie as intermediaries, leading to a fundamental shift in the U.S. mortgage market.
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Homeready & Accessory Dwelling Units And Boarder Income
When Fannie Mae first announced its HomeReady mortgage in 2014, the agency advertised the program as a mortgage for multi-generational households. It permitted boarder income from parents, grandparents, and children, all living under one roof and contributing to monthly payments.
The program expanded several years later to allow accessory dwelling units .
An accessory unit is an area with a kitchen and a bathroom within another home, usually with its own entrance.
Accessory units may be in the basement, above the garage, or attached to the subject property. ADUs may also be separate homes on the land of an existing property.
Home buyers can use income from boarders and accessory units to qualify for a HomeReady mortgage.
With boarder income, buyers can use payments received, dollar-for-dollar, as income toward the mortgage. Proof of payment can be in the form of canceled checks, Venmo or other digital transfers, or bank statements that show deposits into a bank account.
Income from accessory dwelling units cannot be used dollar-for-dollar as income on an application. Lenders will deduct 25% from rent collected on an ADU to account for vacancies and costs. Home buyers are recommended, but not required, to use signed lease agreements that prove their rental income.