Many people think that when it comes to conventional loans that it’s all the same. Not quite.
Conventional loans are mortgages funded through banks or mortgage companies and then sold to one of 2 GSE’s, Fannie Mae or Freddie Mac.
In years past they were private companies but they are today quasi government institutions since being taken over by the government shortly after the housing crisis.
Many banks and lenders don’t always work with both Fannie Mae and Freddie Mac. Some banks only sell to Fannie Mae, so the Freddie Mac options are off the table and vice versa.
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Conventional loans are also known as conforming lending because the mortgages that are funded must conform to Fannie and Freddie’s guidelines. This beckons back to my notion of everyone being a broker nowadays, because even if your bank funds the loan they are underwriting and selling to either Fannie or Freddie. If they are not buying, the bank is not lending.
This is why it’s very important as an originator to understand the subtle differences between Fannie Mae and Freddie Mac. Although 90% of their guidelines and processes are the same there are some very distinct differences. I will cover the areas that I think are important for conventional loans but I am sure there are some differences between the two that I will omit.
First off, Fannie and Freddie use 2 different underwriting engines. Underwriting engines are software programs that review the risk of a file and determine if it is approved. Many times borrowers think that there is someone behind a desk who says yes or no, but it really is a computer program that makes the decision. The underwriter’s job is typically to verify the data being input through the engine.
Fannie Mae’s engine is known as Desktop Underwriter(DU) and Freddie Mac’s engine is known as Loan Prospector (LP). The two engines have contrasting views on what represent strength in a file. From my experience, DU is less credit dependent and loves assets. LP tends to be much more credit driven. When working on files with tight debt ratios, LP is a little better. LP will round down, in comparison Fannie will round up. Example, if the max debt ratio is 50%, Fannie Mae will allow 49.99% where Freddie Mac will let you go 50.49%. It may sound very miniscule but it has saved many a deal by knowing the difference.
Now, I am letting out some secrets here so don’t tell my competitors because I like them being ignorant. This is why the loan officer at the bank usually calls me when they need help with conventional loans.
I work with many self-employed borrowers who in years past would utilize the low doc programs because their tax records aren’t always an accurate representation of the overall health of their business. If you are self-employed, Fannie Mae will always require 2 years tax returns in contrast, Freddie Mac will only require 1 year. I can’t tell you how many deals knowing this fact has saved for me.
The 2 items I just went over are more subtly that program difference but there are some blaring program differences. Here are just a few examples. Cash out refinances, Freddie max is 80%LTV where under some circumstances Fannie Mae will allow 85%LTV. On conforming jumbo loans ($417K to $625,500K) Freddie Mac allows 75LTV cash out where Fannie Mae is limited to 60% LTV. If you need a co-signer, Freddie Mac is the ticket. Freddie will allow a Non-Occupant cosigner (someone who will not live at the property) where Fannie Mae does not allow that. Example, if you are having a hard time qualifying based on debt ratio, a family member who lives elsewhere could co-sign for you and help you obtain the mortgage. FHA also allows this option but is a much more costly option.
If you are an investor that has more than 4 financed properties, you must utilize Fannie Mae. They have a special program that allows borrowers with 5-10 financed properties to continue to obtain conventional loans. There are some more stringent rules imposed by Fannie Mae on conventional loans, but it is a great option for the professional investor.
— Jim Barry
President, CMC - Certified Mortgage Consultant
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