The Benefits of Fannie Mae Loans
Fannie Mae loans have helped make homeownership possible for millions of Americans since the company’s inception in 1938 during the Great Depression. For eight decades, the government-sponsored enterprise (GSE) has worked behind the scenes to improve access to affordable mortgages. This work comes both in the form of creating programs for homeowners and in the form of buying and selling mortgages. Fannie Mae’s role in the mortgage process is indirect. Homeowners do not apply directly to Fannie Mae. Instead, they receive a loan from their chosen lender or broker. After they acquire the loan, the lender sells it to Fannie Mae, recouping the costs immediately. This enables the bank to continue issuing loans, and it enables homeowners to pay a mortgage on more reasonable terms.
When you apply for a home loan that is backed by Fannie Mae, you do not have a government-backed loan. However, you do have lower interest rates, the option for fixed rates and guaranteed payments through the GSE. Since the company will guarantee payment to the banks, you are more likely to be approved by a lender for your mortgage. The sections below describe the secondary mortgage market, and how Fannie Mae benefits you directly and indirectly.
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What is the secondary mortgage market?
By creating Fannie Mae, the U.S. government invented the secondary mortgage market. With the creation of Freddie Mac in 1970, the government created the opportunity for competition within the market. Today, both Fannie Mae and Freddie Mac are owned by the government, which took over the enterprises in the 2008 Great Recession. However, the two enterprises still make up the secondary mortgage market. The secondary market is the behind-the-scenes world of mortgage investing. Rather than involving borrowers who take out loans, it involves trades made directly between lenders and large-scale investors.
Fannie Mae essentially serves as an enormous, consolidated investor for as much as 90 percent of the single-family mortgage housing market. It buys mortgages from lenders, packages them into mortgage-backed securities and sells them to investors around the world. This allows Fannie Mae to supply lenders with regular infusions of cash, keeping the mortgage market moving. Since the company guarantees the loans, investors expand their offerings. Without that guarantee, investors would tighten restrictions out of concern that middle and low-income families would be a greater risk. As a result, homeownership would be much less accessible to the average American.
How Fannie Mae Helps Your Mortgage
By buying mortgages from financial institutions, Fannie Mae enables your lender to approve more loans than it would be able to otherwise. Therefore, the company plays an important role by making your mortgage possible in the first place. However, the government-sponsored enterprise does not only benefit you indirectly through your financial institution. There are also direct benefits to having a mortgage backed, namely in terms of refinancing options.
Having a Fannie Mae-backed mortgage gives you access to programs designed to help with refinancing and make homeownership affordable. For example, if your mortgage is backed by the government-sponsored enterprise, you may qualify for the Home Affordable Refinance Program (HARP). This can help make your mortgage more affordable if you are struggling with high payments or want to change the terms. The HARP program allows you to refinance your mortgage if you meet certain additional qualifications. However, the HARP program is scheduled to end at the end of 2018.
To replace HARP, Fannie Mae is now offering the high loan-to-value (LTV) refinance option. This program allows loans to be refinanced into fixed-rate loans or adjustable-rate mortgages that lower payments or amortization terms. This allows homeowners to bring down expensive mortgages and make monthly payments more manageable. If your mortgage was backed by an organization other than Fannie Mae, you may not have access to refinancing options. If you do, the options may be less than ideal and depend on factors that Fannie Mae would not consider. For example, another investor or lender may not be willing to refinance your mortgage because of the neighborhood you live in. Fannie Mae, on the other hand, would not turn you down based on what area you live in.
Fannie Mae also directly lowers your monthly mortgage bill. Investors who do not sell mortgages to the program take on greater risk and, therefore, charge higher interest rates. Because Fannie Mae is such a powerful guarantor, banks will issue lower interest rates when they know they can sell their mortgages. That means your monthly payments are lowered by reassuring banks that your mortgage is not a risk to them. Therefore, you may pay thousands of dollars less over the lifetime of the mortgage. This government enterprise plays a critical role in bringing first time home buyers to the housing market by making it more accessible.
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How Fannie Mae Continues To Affect Home Buying
Today, Fannie Mae continues to play a critical role in providing access to mortgages, particularly for first time home buyers. The government-sponsored enterprise is developing additional programs to address homeownership rates and make owning a home more accessible to low-income Americans. For example, the company is working on Single Source Validation, which will simplify the mortgage application process. That will ultimately lower costs for both lenders and borrowers, saving Americans on expenses when filling out an application.
In 2018, Fannie Mae launched the Day 1 Certainty program, which helps speed up and simplify the application process for lenders. With the program, if you meet certain requirements, you can waive appraisals and some application steps. This allows you to receive responses and complete the mortgage application process much more quickly. By eliminating bureaucratic steps, the company makes the process of getting a Fannie Mae-backed mortgage much easier for borrowers and lenders.
Additionally, Fannie Mae continues to be a driving force in developing innovative solutions to expand affordable housing through the Sustainable Communities Innovation Challenge. This is an initiative meant to encourage organizations and individuals to develop innovative ideas to make housing affordable. The company committed $10 million to help research and develop proposals designed to lower housing costs for Americans.