Eligibility Criteria for Getting a Loan Backed by Fannie Mae
Fannie Mae has strict criteria for what mortgages it will back and how much risk it will accept. This includes both income requirements and maximum loan limits based on local markets. Loans that meet the Fannie Mae guidelines for eligibility are called conforming loans. These loans will be more affordable than jumbo loans that exceed the institution’s requirements. Conforming loans have smaller interest rates than non-conforming “jumbo loans” do. Finally, only certain lenders can sell loans that are backed by FNMA. Therefore, qualifying for a Fannie Mae-backed mortgage requires research and careful consideration.
Although Fannie Mae is often referenced for lower-income home buyers or first-time buyers, it is not limited to that. Applicants can receive a Fannie Mae-backed loan for second properties or investment properties in addition to primary residences. Petitioners may qualify for a Fannie Mae loan if they are looking for a lower-interest loan for their next property. The sections below describe the eligibility requirements to obtain such a loan.
Minimum Income Eligibility Requirements
Because loan prices vary by location, Fannie Mae’s minimum income requirement varies based on a number of factors. Along with location, Fannie Mae will also consider the consistency of your income, where it comes from and how much debt you have. When you apply for a loan, you must provide a complete picture of your finances. This includes how much money you owe, and what your obligatory monthly payments are.
The Fannie Mae Selling Guide outlines the requirements and calculations a lender must make to determine eligibility. Fannie Mae reviews the relation of your debt to your income when considering your eligibility. Your lender will calculate all your total debt and divide it by your income when you apply. This is called your debt-to-income ratio, or DTI. Typically, you need a DTI of no more than 50 percent to get a loan approved. The exact maximum DTI depends on what type of loan you are applying for. For example, the maximum DTI allowed for manually underwritten loans has the strictest requirements. The maximum ratio for underwriting completed through Desktop Underwriter is almost 15 points higher. Desktop Underwriter is a program used to automatically calculate someone’s eligibility for a Fannie Mae-backed loan.
You can attempt to calculate your own DTI to see if you meet Fannie Mae guidelines before applying. However, it can be difficult to get the precise number. Expect your calculation to be an estimate, not the precise figure that a lender will come up with. Begin by adding up all your monthly expenses, including:
- Auto loan payment.
- Student loan payment.
- Credit card minimum payment.
- Child support payment.
- Alimony payment.
- Other debt payments.
After you add up your monthly expenses, divide the total you found by your monthly gross income. You should use your pre-tax income to determine your DTI. The final number calculated is your DTI ratio. You want a low DTI because it shows that you have manageable debt compared to your income. Fannie Mae may deny you a loan if your DTI is too high. Even if you believe your debt is manageable, DTI may consider it too risky to approve. For more information on eligibility requirements, download our comprehensive guide on Fannie Mae.
Credit Score Eligibility Requirements
In addition to your income, Fannie Mae also considers your credit score to determine your eligibility. The exact requirements vary depending on what type of loan you are seeking. However, generally, the absolute minimum credit score acceptable for a mortgage is 620. The minimum requirement rises steadily depending on how many properties you want to purchase or your DTI. Exact requirements are laid out in the Fannie Mae eligibility matrix, found in the selling guide. To determine your credit score, a lender will obtain three different FICO scores, then throw out the highest and lowest score.
You can keep an eye on your own credit score to determine if you meet Fannie Mae’s guidelines for a mortgage. However, keep in mind that your calculated credit score can vary between financial institutions. Therefore, if you check your credit score beforehand, consider that number an estimate of what your lender will find. Many major banks and credit card providers nowadays allow you to check your FICO score for free. You do not have to pay to find your credit score.
Download our comprehensive guide to learn more about how your DTI, credit score and loan amount influence your eligibility for a Fannie Mae-backed loan.
Mortgage Eligibility Requirements
Along with your income and credit score, Fannie Mae’s loans also consider the overall value of your proposed mortgage. That is, Fannie Mae will calculate a loan-to-value ratio (LTV) for your mortgage. For example, if you wish to buy a home for $150,000 with a $125,000 mortgage, then your LTV would be 83 percent. Your LTV affects more than just whether you are approved or disapproved. It also plays a role in the interest rate you will be charged for your mortgage. A higher LTV, which demonstrates more risk, will come with a higher interest rate than a lower LTV.
Fannie Mae will accept, in some cases, an LTV as high as 97 percent. However, you will be charged a higher interest rate. The exact standards for different types of loan applications are listed in the Fannie Mae eligibility matrix. Additionally, other factors like your credit score and your DTI can make you ineligible. Selecting a house within your means will decrease your chances of paying a higher interest rate or being denied.
In addition to the LTV, Fannie Mae has also set a federal maximum for mortgage prices. The upper limit in most counties for one-unit properties is $453,100. That means applicants cannot receive a Fannie Mae-backed mortgage that exceeds that amount for a single-unit property. In areas that have significantly higher average home prices, the limit is up to 150 percent higher. The exact limit will vary by region and county. However, most counties in the United States will follow the standard upper limit of $453,100. Fannie Mae is designed to make homeownership more affordable to Americans by providing lower interest rates. Therefore, they will prioritize mortgages for more modest homes over mortgages for larger, more expensive homes. This is true even for applicants seeking second properties or investment properties. However, the upper limit will increase proportionally for such applications.
To learn more about eligibility criteria, download our free and informative guide.