Mortgage BasicsFannie Mae and Freddie Mac: Why Are They Important, and How Do...

Fannie Mae and Freddie Mac: Why Are They Important, and How Do They Differ?

Fannie Mae and Freddie Mac are both government-backed mortgage companies that assist prospective homebuyers through access to funds and guarantees to thousands of banks and mortgage companies across the country.

Both firms perform many similar functions but differ in some fundamental ways. This article will outline each company’s main functions, why they are important, and their differences and similarities. 

Key Similarities Between Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are government-sponsored enterprises working with mortgage markets. Fannie and Freddie protect lenders by purchasing mortgages and turning them into mortgage-backed securities available to investors. In simple terms, Fannie and Freddie make it safer and more fiscally viable for lenders to loan money to potential homebuyers.

The government-backed companies provide stability to mortgage markets by ensuring that people who want to buy a home have a steady supply of mortgage money. Fannie and Freddie also keep interest rates low and expand the amount of funds available to homebuyers. By backing mortgages, lenders are confident they will get their money back, therefore lowering their risk and increasing their willingness to keep interest rates low and lend to “risky” borrowers.

In short, Fannie Mae and Freddie Mac guarantee home mortgages, which reduces lenders’ risk and increases homebuyers’ opportunities. Borrowers who take out a mortgage through Fannie and Freddie may receive lower interest rates, a low down payment, and more lenient lending requirements. 

Differences Between Freddie Mac And Fannie Mae

Mortgage Sourcing

Freddie Mac purchases mortgages from smaller banks, while Fannie Mae buys mortgages from larger, commercial banks. 

Purpose

Congress created Fannie Mae first to provide accessible funding and more affordable housing. Freddie Mac began as a public enterprise intended to expand the secondary mortgage market. 

Guidelines for Approval

Freddie Mac is more likely to loan money to applicants with low credit scores, poor credit history, and a high debt-to-income ratio

Lending Requirements and Down Payment

Freddie Mac’s standard loan program requires a minimum of five percent down, while Fannie Mae mandates a three percent down payment and a fixed-rate purchase loan.

Loan Programs

Fannie Mae offers the Home Ready loan, which only accepts applicants earning less than 80% of the area’s median income. Freddie offers the Home Possible program, which requires that applicants live in their purchased home and that they earn less than the area’s average income.  

Fannie Mae or Freddie Mac: Which is Right for You?

Think about the loan requirements you’re looking for and if you’d rather have your mortgage sourced from a large or small lender. When conducting your research, be sure to talk to an expert to learn more about your best home loan options.

Tyler Williams

Tyler graduated from Virginia Commonwealth University in 2017 with a Bachelor's degree in Urban and Regional Studies. Currently based in Los Angeles, he works as a freelance content writer and copywriter for companies in real estate, property management, and similar industries. Tyler's main professional passion is writing about critical issues affecting big and small cities alike, including housing affordability, homelessness, inequality, and transportation. When he isn't working, he usually plans his next road trip or explores new neighborhoods and hiking trails.