If you’ve ever gone completely through the mortgage process you know full well there are rules that lenders must follow.
From federal compliance to following lending procedures, it sometimes seems a lender’s series of questions will never end.
There are definite reasons for all of this and you should certainly know that lenders would rather ask fewer questions than more. As it relates to qualifying for a mortgage, the lender must determine your loan application meets established guidelines.
The majority of home loans approved today are conventional mortgages underwritten to Fannie Mae and Freddie Mac guidelines. It’s vitally important that lenders adhere to these guidelines to keep them in business. In the mortgage industry, there is a secondary mortgage market that lenders participate in far beyond the closing of your loan. This secondary market is the buying and selling of mortgage loans, either individually or packaged up in bulk and sold.
Why do lenders buy and sell mortgage loans?
Why don’t they just keep a loan in their portfolio and collect the monthly interest?
Two basic reasons. A lender can improve its own cash flow selling a loan early and not wait to receive interest from the borrower. This is similar to selling a discounted note to collect immediate proceeds instead of waiting over a relatively long period. The second, and most important, is that selling a loan replenishes a lender’s credit line allowing the lender to make still more loans. In fact, one of the primary missions of Fannie Mae and Freddie Mac was to free up funds and creating liquidity in the secondary market. As long as a loan met the standards for Fannie Mae or Freddie Mac, the loan could easily be sold.
But Fannie Mae And Freddie Mac Aren’t Exactly The Same
Sometimes a loan underwritten to a Freddie standard might be turned down yet when approved with Fannie guidelines the loan could very well be approved.
An experienced lender who has access to both programs will know in advance which set of guidelines to use. You, the borrower, don’t necessarily need to know which guidelines best suit your situation but your lender must. All too often a mortgage company turns down a loan application when the only issue was because the loan application was underwritten under the wrong program. In most respects, if a loan application is submitted to a lender it could typically be approved under either, but in others it can’t.
Basic Differences Of Fannie Mae vs. Freddie Mac
Fannie Mae and Freddie Mac are almost identical as it relates to approval guidelines. There are loan limits for each program and loans can be used to finance a primary residence, a second home or an investment property.
There are both fixed rate and adjustable rate loan types and both require a down payment. Yet there are differences and even though the difference may appear minor at first glance that difference can mean whether or not a loan is approved. Lenders who intimately understand these guidelines won’t waste any time underwriting a loan using the wrong parameters.
As it relates to rental income for example, a loan underwritten to Fannie guidelines and approved using its Automated Underwriting System, can accept rental income to help qualify even though there is no valid, signed lease agreement whereas Freddie Mac does not allow rental income to be used if there is no lease agreement nor a security deposit.
In another update, Freddie Mac only recently changed its view on landlord experience and just like Fannie no longer requires landlord experience.
Blended Ratios
Blended debt ratios are those using the occupying borrower’s income and debt along with a cosigner’s income and debt. A blended ratio simply adds everything together as if it were one borrowing entity. Fannie Mae has just recently accepted blended ratios as Freddie Mac has.
Does a condominium project need an approval?
Fannie Mae accepts a limited condo review if the automated underwriting system lists that a limited review is acceptable. A streamlined review for Freddie Mac is acceptable even though there is no message in the loan findings it is acceptable.
Is the loan funding directly into a Trust?
Fannie only requires the pertinent pages from the trust and does not require the title to be hold exclusively in the trust. Freddie Mac guidelines require all pages of the trust to be submitted and reviewed by the lender and title can then only be held by the trust, not the trustee or the borrowers.
New job in the future?
Then you probably have an employment contract. Fannie guidelines require you to begin work prior to closing on your new mortgage while with Freddie you can start to work within 90 days of closing.
Mistake on a credit report?
Freddie Mac guidelines say that a disputed account in the credit file doesn’t require any confirmation of the accuracy of the disputed account whereas Fannie Mae does. With Fannie, the disputed account must in fact be removed from the credit report and resubmitted to the automated underwriting system.
There are other differences and you might come away thinking these differences are so minor they don’t matter. But they do if any of these examples apply to your situation.
Here at Home Point, we know the differences upfront and your loan will be submitted under the proper program for a smooth loan approval process.
