The costs of homeownership are ever-growing. If you cannot afford to purchase a home on your own, it may be in your best interest to seek out a home loan. The Federal National Mortgage Association (FNMA), otherwise known as Fannie Mae, offers federal incentives that are designed to help residents who find themselves in that position. The goal of Fannie Mae is to keep the mortgage market stable by providing federal funds to lenders. In turn, these lenders offer home mortgages to borrowers like you.
If you have pursued the idea of getting a traditional home loan but had no success, Fannie Mae may be an option that you can explore. Overall, Fannie Mae helps you obtain a home mortgage with a lower interest rate that you are able to afford. It does so with the help of multiple investors across the country. Below is more information about how Fannie Mae works and what it can do for you.
When and How Fannie Mae Began
From 1929 to 1946, the Great Depression caused severe economic hardships in the United States. In 1938, in the middle of the worst recession on record, Americans needed a new form of homeownership assistance. The federal government established a system of economic aid programs collectively known as the New Deal to help American citizens recover financially. Among those various programs, Fannie Mae was created.
Fannie Mae was initially established to help U.S. citizens with moderate or low income afford homes. The program has undergone some changes over the years, but its root purpose is the same. Today, Fannie Mae is a firmly established federal program known across the country. It is part of a secondary mortgage market operating across the nation.
How the Fannie May Program Works
When you visit a lender offering a low-interest loan that is available through Fannie Mae assistance, you may wonder how that relationship works. In general, Fannie Mae purchases mortgages from a lender. The funds from those mortgage sales are then redistributed by the lender. That redistribution is in the form of low-interest mortgages like the one for which you apply.
When Fannie Mae purchases a mortgage, the mortgage is held in the portfolio of the organization. In certain instances, a purchased mortgage may be added to a mortgage-backed security. Mortgage-backed securities (MBS) are groups of pooled mortgages that typically consist of residential mortgages and certificates that are issued to investors. Those certificates entitle the holders, which are often lending institutions, to collect portions of funds based on payments of interest or principal balances of any loans grouped in the MBS in question.
Fannie Mae Loan Fees
When Fannie Mae issues an MBS to a lender, the program offers a guarantee of interest and principal payment. However, those guarantees come at a cost in the form of a guarantee fee. If you acquire a Fannie Mae-backed mortgage from a lender, this fee is passed to you as the borrower. The overall amount you must pay for such a loan is lower than the amount paid for a typical home mortgage.
The fees charged to your lender by Fannie Mae are necessary to cover basic costs, such as administrative fees. The funds collected from those fees are necessary to protect Fannie Mae from losses, which generally occur when a borrower goes into default. Fannie Mae charges fees to lenders in two ways. The guarantee fee is sometimes charged at the point of loan acquisition, but it is possible that the loan may have an ongoing monthly fee instead of, or in addition to, an upfront fee. As the borrower, you may not know the difference. Your lender simply charges you a higher interest rate commensurate with all the necessary fees.
Applying for a Mortgage Backed by Fannie Mae
Applying for a mortgage backed by Fannie Mae requires you to first locate a lender offering such mortgages. Then, you must gather financial information that is used by lenders to determine your eligibility for all types of Fannie Mae-backed mortgages. If you qualify for one, the information will be used to determine the finer aspects of the mortgage agreement, such as the interest rate for which you can qualify for. Financial information you must provide vary, but typically include:
Your front-end debt-to-income (DTI) ratio is analyzed whenever you apply for a Fannie Mae-backed mortgage. The DTI is the amount of your gross income that is used to pay for housing. The amount of money you contribute to monthly mortgage payments directly affects your ability to qualify for a mortgage. If you quality for this type of mortgage, this amount will affect the rates and minimum monthly payment requirements you can receive.
Applying for Loan Modifications Through Fannie Mae
Another aspect of Fannie Mae that has become popular is loan modification. From 2009 to 2017, 1.5 million modifications related to Fannie Mae-backed mortgages took place. In general, you may apply for a loan modification if you have an existing Fannie Mae mortgage and have difficulty meeting your mortgage payments on time. If you qualify, a loan modification will help you prevent defaulting on the mortgage.
The first type of loan modification you may qualify for is a lowered interest rate. If you qualify for an interest rate reduction, your rate is reduced to a Fannie Mae Modification Interest Rate. This amount is the established rate at the time of your application for loan modification. Generally, this percentage is regularly recalculated by Fannie Mae. Each time the rate changes, Fannie Mae publishes the current rate.
The other Fannie Mae-backed loan modification you may qualify for is a loan term extension. When you obtain a mortgage, you are given a period of time during which you must repay the loan referred to as a loan term. Requesting a loan term extension reduces the monthly amount you must pay. Moreover, it gives you time to repay the total balance. This extended time period allows the loan to accumulate more interest.