What's the difference between Fannie Mae and Freddie Mac?

If you've been learning more about mortgages or have recently begun exploring your options for an upcoming home purchase, you've probably encountered the names Fannie Mae and Freddie Mac.

While not knowing too much about these two entities isn't going to prevent you from buying a home, it's always helpful to have a little more background, especially when it comes to their roles and functions in relation to mortgages and the homebuying process.

Below, Select breaks down what you need to know about Fannie Mae and Freddie Mac and takes a closer look at some of the loan products they offer.

Both Fannie Mae and Freddie Mac are corporations that buy mortgages from banks — by doing so, they're essentially helping banks to create more cash flow so they can continue originating and processing home loans for everyday people. Each of the two entities then either holds onto those mortgages as part of their own portfolio or repackages them into mortgage-backed securities.

Fannie Mae is actually the nickname for the Federal National Mortgage Association, while Freddie Mac is the nickname for the Federal Home Loan Mortgage Corporation.

The first entity, Fannie Mae, was created in 1938 by the U.S. Congress at a time when there was a lack of affordable housing due to the Great Depression, which happened in the U.S. from 1929 to 1939. Its introduction actually led to the long-term, fixed-rate mortgage, a type of mortgage that's still popular today.

More than 30 years later, Freddie Mac was created in 1970 as a way to help expand the secondary mortgage market — a market in which lenders and investors buy and sell home loans — and alleviate some of the interest rate risk for banks.

While Fannie Mae was created before Freddie Mac, the differences don't stop there. The two corporations each purchase their loans from different sources — Fannie Mae buys them from large banks and credit unions while Freddie Mac buys them from smaller banks and credit unions.

Both entities purchase and sell conventional loans. And although Fannie Mae and Freddie Mac are each backed by the federal government, the loans themselves are not. The conventional loans are backed by private lenders. So, you would not apply directly with Fannie Mae or Freddie Mac for a mortgage, but the mortgage you get may be purchased by either of the companies.

The loans can also be conforming or non-conforming, meaning they'd adhere to, or conform to, Fannie Mae and Freddie Mac's funding criteria and wouldn't exceed a certain amount, which changes each year — for 2023, the conforming loan limit is $726,200 for a single-family property unless you live in a state with a higher cost of living that states otherwise. That said, jumbo loans are an example of a non-conforming loan that can be used to borrow more money than the aforementioned limit.

In terms of loan programs, Fannie Mae offers the HomeReady® Mortgage, which is geared toward low- to mid-income homebuyers and allows them to make down payments as low as 3%. Certain rules apply, however: Applicants must have a debt-to-income ratio of no more than 50% and their income must be equal to or less than 80% of the area's median income.

Since you can't take out a HomeReady® Mortgage directly from Fannie Mae, you'll have to apply through a lender, such as a bank or credit union. Ally Bank is one such lender that offers this loan.

Freddie Mac, on the other hand, offers the HomePossible® mortgage, which generally requires a minimum down payment of 3%. Note that for this particular loan program, qualifying applicants cannot earn more than their area's average income.

It's worth noting that though the 3% minimum down payment is still a little lower than the 3.5% minimum requirement you'd need for an FHA loan, if an FHA loan is a better fit for your financial circumstances, you should consider going with a lender such as Rocket Mortgage and Chase Bank, which offers that option.

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