Millennials who want to buy a home have probably heard of Fannie Mae, Freddie Mac and FHA. All of these are government backed entities that use different methods to extend loans to first time and other types of buyers who may have had difficulty getting credit in the past.
This article will help you to understand how Fannie Mae, Freddie Mac and FHA work and why many millennials are choosing Fannie and Freddie for their mortgage needs.
Find Out Why Millennial Home Buyers Are Migrating Back to Fannie and Freddie Loan Programs.
The Federal Housing Administration (FHA) started during the Great Depression when more than half of the country had to rent. It was simply too expensive and difficult for most people of normal means to get a mortgage. FHA financing can be a good fit for home buyers who have limited income, lower credit score and less ability to make a down payment. FHA does not issue the loan itself. It merely guarantees the loan against default. These loans come with very low interest rates, often under market value. Also, you generally can have only a 3.5% down payment. They are a good choice for buyers who had a serious credit problem in the last several years, but who are currently paying their bills on time.
While FHA mortgages are good products, they are not for everyone. First, FHA loans have high mortgage insurance costs that you must pay when the loan closes and each month. This adds thousands of dollars to the cost of your loan. Yes, the FHA loan approval process may be easier in some cases, paying more every month for mortgage insurance does not make sense if you have alternatives.
Second, if your loan is made with less than 10% down, current FHA policy states that you must pay mortgage insurance for the life of the loan, even after you have 20% equity in the home. This is a very expensive and some would say unnecessary policy, but it is current FHA regulation.
For these reasons, some millennials have started to look to Fannie and Freddie backed loans to buy a home. What are these loans about?
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government supporters of mortgage lenders. This is done so that they can provide more home loans to home buyers. Unlike the FHA, Fannie and Freddie do not actually insure the loan against default. They offer support to lenders by buying the mortgage notes from the lenders so that those lenders can make more loans.
The Fannie Mae home loans are then packaged and sold as mortgage backed securities in the stock market. The mortgages are usually packaged to spread the risk that any specific loan in a single security would default. Fannie Mae sold $26 billion worth of loans in 2016.
Fannie and Freddie set standards for the mortgage loans that lenders can offer buyers. There was a time when lending standards were so lax it was possible for home buyers to qualify for loans with little income documentation. This meant some were unable to pay their loans, especially if they had adjustable rate mortgages. When they reset to higher rates, millions could no longer afford the loans.
These days, lending standards set by Fannie and Freddie are tighter. There are still very good loan products offered by lenders supported by Fannie and Freddie. But you will need to show you have the income to pay the loan and your other obligations, just as you must with an FHA loan.
One of the most popular options for millennials is the HomeReady Mortgage backed by Fannie Mae. Another is the Conventional 97 Mortgage. Both products target people with lower incomes and down payments, especially those who live in certain parts of the country. If you meet the requirements, you may be able to get a Fannie Mae loan with just 3% down. The Conventional 97 loan is a good product for the first time home buyer with limited income and down payment. The 3% down-payment required by Fannie Mae remains attractive to new house buyers in 2018.
One reason some millennials choose Fannie Mae or Freddie Mac is mortgage insurance. You are required on these loans to pay mortgage insurance, but that requirement is waived once you have 20% equity through either appreciation or mortgage payments, or a combination. With FHA loans, most borrowers must pay mortgage insurance for the loan’s life.
Some millennials also prefer not getting an FHA mortgage because it is known to be a ‘government mortgage’ that some sellers may not want to deal with. There is a perception that FHA is harder to deal with; this is really not true these days, but some sellers may prefer buyers with conventional financing lined up.
The Takeaway on Millennial Home Buying
Both FHA and Fannie Mae and Freddie Mac loans are good loan products for millions of people. All of the government entities help to encourage home ownership for middle class buyers with reliable income. But Fannie Mae and Freddie Mac loans are more popular these days with millennial buyers for the reasons mentioned above.