Who are Fannie Mae and Freddie Mac?
Fannie and Freddie are two giants of the mortgage industry that make home buying possible. Ever wonder where the money for your mortgage comes from? It's not the bank. There is less than $0.5 trillion of savings deposits in banks but more than $12 trillion in outstanding mortgage debt. Liquidity in housing markets is primarily injected by two govt. sponsored enterprises, namely Fannie Mae and Freddie Mac. They have different origin stories and slightly different underwriting guidelines but serve the same purpose: buy mortgages from originators and lenders (like Chase or Wells Fargo) and sell them to bond investors.
Their mission is affordable homeownership
Freddie Mac is Making Home Possible for families across the nation by financing the creation and preservation of more affordable homeownership and rental opportunities
Fannie Mae's historical mission is to provide liquidity, stability, and affordability to the U.S. housing finance system, in all communities, under all economic conditions.
Home Ready is Fannie Mae's affordable home-buying program. Home Possible is Freddie Mac's affordable program for homeownership
The two programs are similar and target first-time and low-income borrowers and offer similar benefits in the form of
No Loan Level Pricing Adjustments or LLPAs
Low down payments ~3% min
Lower PMI
The biggest difference is the credit score requirements. Home Possible requires a minimum FICO of 660, while HomeReady borrowers can qualify with scores as low as 620.
Eligibility requirements
A credit score of >660 for Home Possible or >620 for Home Ready
The home must be a primary residence, not a rental
A debt-to-income rate of 50% or lower
Proof of employment and work history
A combined income of no more than 80% of the area’s median income
While these are the minimum requirements set forth by Freddie Mac, some lenders may have additional qualification requirements or might have limits that are more stringent than the Freddie Mac guidelines.
Loan and Income Limits
Income levels and home prices vary greatly across the country. To qualify the combined income of all borrowers must not exceed 80% of the area’s median income.
In Houston, TX, for example, the median income is $94,100, so the income limit for 1% down borrowers is $75,280 (80% of $104,300). Comparatively, the median income for Austin, Texas is $122,300, so the income limits would be $97,840. To make things easier Fannie Mae has an AMI tool to show median income limits across the country.
Fannie Mae and Freddie Mac use conforming loan limit rules, which change annually, to determine the maximum loan amount a borrower qualifies for under the program. The conforming loan limits in 2023 for one-unit properties are between $726,200 and $1,089,300, in high-cost zip codes e.g. CA, HI, NY, AK
Home Ready/Possible vs FHA loans
There are two big reasons to go with an FHA loan.
Credit score - FHA loans allow for FICO scores as low as 500 with 10% down or 580 with 3.5% down. If your score is above 620, conventional programs like HomeReady are worth a look because they waive FICO-based rate adjustments
DTI limits - FHA loans allow for DTI limits up to 57% vs 50% for most conventional loans. A higher DTI may be needed if you are income is low-moderate and total debt including housing payments exceeds 50% of your gross income.