Most people have heard of Fannie Mae and Freddie Mac, and usually in conjunction with one another. And if you have ever received a home loan, it is highly likely that your loan is or was owned by one of these two government-sponsored enterprises. Fannie Mae and Freddie Mac essentially set the standards for qualifying for a loan, and lenders ultimately want to be able to sell your mortgage to them so that it frees up their money to lend to another homeowner.
Nearly all of the lenders I work with offer loans and rates that are sold to both enterprises, and I have the ability to choose at the onset if it will be a Fannie loan or a Freddie loan. Why is this important? Well, in most scenarios, it actually doesn’t matter, but they do have different guidelines, and sometimes going with one over another may make or break the loan for you. Here are a few talking points of what Fannie offers versus Freddie, and vice versa:
- Primary residence definition: One of Fannie Mae’s definitions of a primary residence is the ability to buy a home for your elderly parent or your disabled adult child, and it is considered owner-occupied; therefore, you get an optimal interest rate. Freddie would not allow this.
- Student loans in deferment: Fannie Mae will use 1% of the balance for qualifying; Freddie Mac will use .5%, so if your qualifying ratio is a little tight, Freddie would be more favorable.
- Cash back: To be considered a no-cash out refinance, Fannie Mae allows up to $2,000 back to you at closing; Freddie will allow up to 1% of the loan amount (so if your loan amount is $500,000, you can get up to $5k cash back and it is still not considered a cash out loan)
- Buy-out of a co-owner: Fannie Mae allows you to buy out a co-owner of your home (most often an ex-spouse), and get the cash proceeds to be paid directly to that person, and it not considered a cash-out refinance. Freddie would consider it cash-out.
There are just a few examples of the differences. If any of the situations impact your loan and interest rate, it is good to work with a lender that offers both options and also is aware of these distinct differences. Please let me know if you have any questions!