Fannie Mae is a government-sponsored enterprise (GSE) that was created as part of the New Deal in 1938 to increase the availability of affordable housing. Fannie Mae is the short name for the Federal National Mortgage Association (FNMA). Rather than lend money directly to the consumer, Fannie Mae buys loans from other lenders, allowing them to lend money to more people. Loans bought by Fannie Mae have helped millions of people in the U.S. buy a home. Lenders offering Fannie Mae loans must agree to the lending standards and the conforming loan limits set by the Federal Housing Finance Agency (FHFA). But this type of conventional home loan isn’t for everyone. Consider the pros and cons of Fannie Mae loans before signing on the dotted line.
Pros and Cons
Pros of Fannie Mae Loans Explained
There are many good things about Fannie Mae loans. Before securing this type of mortgage, consider the pros.
Qualification Guidelines Designed To Help More People Buy Homes
You must meet certain qualification guidelines to be approved for a Fannie Mae loan. But instead of limiting the number of people who can buy houses, these guidelines are designed to help more people buy homes. For example, you can purchase a home with a Fannie Mae loan even if your credit score isn’t great. There’s a minimum requirement of 620, which is only in the fair range for FICO scores. This allows people who wouldn’t normally qualify for a mortgage purchase a home.
Low Down Payment Loan Options
If you don’t have a lot of money saved, getting 20% together for a down payment can seem impossible. But since the goal of the Fannie Mae loans is to help more people get into houses, it’s possible to get a mortgage without a lot of cash upfront. In fact, you may only need to put 3% down. This low down payment can save you a lot of money on the front end of your purchase, making it easier to buy your dream home.
Accepts Nontraditional Income Sources
If you don’t have a traditional job, such one with a W-2 form, don’t worry—you 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, you’ll 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.
Offers Different Types of Loans To Meet Your Needs
Fannie Mae loans aren’t a single mortgage product. There are a variety of different loans that fall under the Fannie Mae umbrella. This means you can find a loan that meets your specific needs, rather than being stuck with a one-size-fits-all mortgage. Here are three of the common Fannie Mae loans you can get: With so many types of loans available, you’re sure to find a Fannie Mae one that meets your needs.
Mortgage Insurance Can Be Canceled
If you don’t put at least 20% down on your home, you’ll need to pay for mortgage insurance. Mortgage insurance protects the lender in case you default on your loan. With a Fannie Mae loan, you can cancel your mortgage insurance once you reach 20% equity in your home. This isn’t the case with all home loans, so it’s a nice perk.
Cons of Fannie Mae Loans Explained
Of course, the Fannie Mae loan isn’t right for everyone. Here are four downsides to consider.
Possible Mortgage Insurance
Although Fannie Mae loans offer a low down payment option of 3%, if your down payment is not equal to a certain amount, you’ll need to purchase mortgage insurance. This extra monthly cost is added to your mortgage. The good news is that you can cancel your mortgage insurance once you reach 20% equity in your home. That saves you some money. But until then, you’ll have to pay it.
Possible Income Limits
While Fannie Mae loans are available to a wide range of borrowers, there are some income limits in place. For example, the HomeReady loan is designed for borrowers with low- to moderate-incomes. So, if your income is considered too high, you won’t qualify for this type of Fannie Mae loan. You may still qualify for a different type of Fannie Mae loan, though. Based on your income and other factors, your lender can help you determine which loan is right for you.
Not Available From All Mortgage Lenders
Not all mortgage lenders are approved to offer Fannie Mae loans. So, if you have a favorite bank or credit union you’d like to work with, check to see if it offers this type of mortgage. Otherwise, you’ll need to go with a different lender.
Homeownership Class Required
Some Fannie Mae loans, such as the HomeReady mortgage, require you to take a homeownership class if you’re a first-time homebuyer. These courses cover homebuying in detail, so you better understand the process and what to expect.
Alternatives to Fannie Mae Loans
Fannie Mae loans aren’t the only option for first-time homebuyers. If the cons outweigh the pros of a Fannie Mae loan, here are three alternatives to consider.
FHA Loan
One alternative is to take out an FHA loan. The Federal Housing Administration backs these, and they’re available to first-time homebuyers with less-than-perfect credit. You don’t need a large down payment with an FHA loan, either.
Freddie Mac Loan
Another option is a Freddie Mac loan. These loans are backed by Freddie Mac, a government-sponsored enterprise similar to Fannie Mae. Freddie Mac’s HomeOne loans offer low down payments and relaxed credit score requirements for first-time homebuyers.
VA Loan
Though not an alternative for all first-time homebuyers, those who have served in the military or are currently serving can qualify for a VA home loan. The Department of Veterans Affairs backs these loans, and they offer flexible credit requirements and 0% down payment options. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
