The Best Conventional Mortgage: Fannie Mae or Freddie Mac?

Fannie Mae and Freddie Mac are the well-known conventional home mortgage companies. They’re classified as government-sponsored enterprises — GSEs.

Both Fannie Mae and Freddie Mac are creatures of Congress. Both are investors in the mortgage market. Both are in the business of offering guarantees to banks and brokers nationwide. And both, as they exist today, back conventional (as opposed to government-insured) loans.

So, why are there two? What’s the difference? And if you are going with a conventional loan, which will be the best pick for your mortgage? Let’s see.

Meet Fannie and Freddie…

The Federal National Mortgage Association (a.k.a. Fannie Mae) came into being in the 1930s, as a government entity tasked with dealing with the terrible aftermath of the Great Depression. To support accessible financing for home buyers, Fannie started by buying Federal Housing Administration (FHA) and U.S. Veterans Affairs (VA) loans. Fannie created long-term, fixed-rate mortgages that borrowers could always refinance. Today, it’s a bit different. It is a shareholder-owned corporation, buying conventional loans.

In 1970, the federal government chartered the Federal Home Loan Mortgage Corporation (Freddie Mac) as a private company that would compete with Fannie Mae. The idea was that competition would keep mortgage costs down, and help reduce default risks.

Once upon a time, Congress authorized both Fannie and Freddie to back mortgages with subprime rates. These were infamously high-risk/reward loans. In 2007, risk won out.

A foreclosure crisis unfolded, and banks wouldn’t lend without backing from Fannie or Freddie — who incurred major losses by backing them. By 2008, the U.S. Treasury was bailing out both Fannie and Freddie.

Today’s Fannie Mae and Freddie Mac aren’t involved in such risky debt. They still provide liquid funds to mortgage lenders by buying their loans. The lenders, with that money freed up, can then lend out more money in the form of more mortgages.  

The Ascent explains how Fannie and Freddie power thesecondary mortgage market:

Banks and lenders issue conventional mortgage loans to consumers. Fannie Mae and Freddie Mac buy those loans from the lenders. A lender can then use the funds from the sale to keep issuing more mortgage loans. The GSEs then bundle those purchased loans into pools of mortgage-backed securities and sell them to investors. 

Investors will buy mortgage stocks if there’s a low risk of default on the underlying debts. This incentivizes Fannie and Freddie to focus on conventional loans and applicants with good credit profiles. As Fannie and Freddie spend their funds, supporting the lenders, money keeps flowing into the market. The result of this continual flow? Lower-cost mortgage loans at more accessible rates.

At the same time, these two entities guarantee the repayment of the debts that the mortgage-backed securities are based on. In short, Fannie Mae and Freddie Mac are entrusted with the work of ensuring that the U.S. housing market stays active and healthy. And they do it at the nexus of the government and Wall Street.

…And Their Signature Loans

Fannie Mae has long been known and for its HomeReady® loan for modest-income home buyers. The borrowers can have fairly high debt-to-income ratios — as high as 50%.

If an applicant has a credit score of 620+, HomeReady allows various funding sources to come into the loan. That means a borrower can pay for the house with wages, Social Security payments, disability income, and other people’s gifts. In fact, all the money can come from gifts. For an applicant with high debt and not so high income, it’s acceptable to have the backup of other people. In some cases, the helpers might not need to be named co-borrowers.

Mortgage companies are familiar with Fannie Mae’s eligibility rules, and can let individual applicants know whether they are likely to be approved for one of these loans.

Freddie Mac offers Home Possible® and HomeOne® mortgages, available for as little as 3% down and designed for buyers with modest incomes. The Home Possible mortgage has a 660+ credit score minimum. It does allow the borrower to use other people’s gift money to cover the down payment or part of it. The borrower can have a co-borrower if one is needed for eligibility.

Another very popular loan from Freddie Mac is the HomeOne mortgage. The borrower’s income does not have to be under a certain ceiling. And the down payment can be as low as 3%.

Both of these conventional loan companies offer 5%-down loans, so there are options for applicants who don’t fit the criteria for their 3%-down mortgages. Fannie Mae offers a dozen kinds of mortgages, including loans geared for renovations, refinancing, or energy-efficiency upgrades. Freddie Mac has even more types of loans. Approval criteria will vary by the type of loan sought. Most borrowers with FICO® scores of 620+ and debt-to-income ratios up to 43% will be considered for these loans.

Note: Borrowers seeking loans with low down payments will be expected to take a government-vetted home financing course.

So, Which One Is a Match for You?

For loan applicants who have high debt-to-income ratios or credit profile concerns, which of the two loan backers is easier to work with? It’s likely that Freddie Mac will be the more flexible of the two. Why? Freddie buys more loans from smaller lenders, credit unions, and local banks than Fannie does. So, which loan you seek could depend on whether you want to borrow from a large bank or, say, a local credit union.

Which loan you end up with will depend on how your mortgage consultant works your credit profile and many other details of your financial life into the eligibility standards of these two companies. If you aren’t eligible for either at this time, then a government-backed loan that’s more flexible might be the best match. A loan backed by the FHA is available with down payments as low as 3.5%. The lower the credit score, the higher a down payment will need to be. Note, though, that the FHA limits the amount of gift money allowed for the down payment.

Going with a Fannie Mae or Freddie Mac loan has another advantage, too. It means you don’t need to keep including private mortgage insurance (PMI) in your monthly mortgage payment as long as you hold the loan. A borrower can get out of the PMI after paying off the equivalent of a 20% down payment. Learn more in our Guide to Private Mortgage Insurance.

Explore Further

Interested in Freddie or Fannie loans? We hope this introductory information has inspired you to explore further. The best way to do it? Talk to a mortgage consultant about your personal financial facts, and your long-term hopes and dreams.

Supporting References

Federal Housing Finance Agency: About Fannie Mae and Freddie Mac.

Shane McIntyre for Choice Home Mortgage via Fannie Mae vs. Freddie Mac – What you Should Know (Jan. 12, 2022).

Andrew Dehan for Rocket Fannie Mae vs. Freddie Mac (May 18, 2022).

The Ascent, via Fannie Mae vs. Freddie Mac – What’s the Difference? (updated Mar. 14, 2022).

Kimberly Amadeo for The Balance: Fannie Mae vs. Freddie Mac – What’s the Difference Between Fannie Mae and Freddie Mac? (updated May 22, 2022). Just 3% Down? Here’s How It’s Done (Nov. 26, 2021).

And as linked.

Photo credits: RODNAE Productions, via Pexels.