All Thing Real Estate: Freddie Mac, Fannie Mae and FHA crucial to lending

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All Thing Real Estate: Freddie Mac, Fannie Mae and FHA crucial to lending
Philip Raices

Interest rates have doubled over the last eight months, closing the door on our lowest interest rates in history and hitting bottom during the Covid-19 pandemic between 2020-2021. It was meant to be a temporary stopgap measure to salvage our ailing economy that was literally shut down due to the pandemic. However, rates actually dropped much lower than I and many economists anticipated and at their lowest point averaged 2.65%.

If you had applied for a $200,000 mortgage, the monthly cost would have been $806, which would have been $662, or $7,900 savings per year, compared to the overall normal long-term average rate of 8%. However, from 1971 through June 2022, 30-year fixed rate mortgages averaged 7.77%, according to Freddie Mac.
What are the differences between Freddie Mac, (Federal Home Loan Mortgage Corporation) Fannie Mae (Federal National Mortgage Association) started in 1938 to stimulate and encourage homeownership) and FHA (Federal Housing Administration) backed loans secured by Ginnie Mae and insured and guaranteed by H.U.D./Housing Urban Development Corporation?

Freddie Mac often buys loans from smaller banks and Fannie Mae purchases mortgages from larger commercial banks and lenders and they both have different requirements for the mortgages they purchase and both are GSE’s (government-backed enterprises) created by Congress to enable the flow of money, liquidity, stability and affordability.

Loans are packaged into mortgage-backed securities for sale to investors on the secondary mortgage market. This process enables the guarantee of the timely payments of principal and interest on the underlying mortgages. This makes secondary mortgage markets more liquid and lowers the interest rates paid by mortgage borrowers, which would be considerably higher without them.

Minimum credit scores required are 620 and debt/income ratios up to 49%. Credit between 620 and 640 may take longer to obtain loans than higher scores. However, FHA loans can potentially be done with credit scores as low as 500, but different terms and conditions will apply. Without these organizations mortgage interest rates to purchase homes would be considerably higher.

Fannie Mae, Freddie Mac and FHA mortgages are more lenient and allow many who have lower credit scores or lower down payments to as little as 3%. Buyers who would not normally be approved for a conventional mortgage, which requires a 20% out-of-pocket down payment, may still be able to secure a home loan. However, an added cost is P.M.I. (private mortgage insurance) when less than the normally required 20% down payment is provided by the purchaser. H.U.D. thereby guarantees the loan. This program allows more individuals and families to qualify to purchase a home and who without it would not. Other terms are as follows:
1.) Terms of up to 30 years
2.) No income limit
3.) Down payment and reserves can be gifted
4.) One buyer has to be a first-time purchaser as long as that person had no ownership within the last three years
5.) Loans have to conform to GSE guidelines

Don’t lose hope due to higher rates that you can’t or won’t be able to qualify and realize your dream of homeownership for a single family, condo or coop (but not FHA on co-ops) under Freddie Mac and Fannie Mae. Obviously, paying rent month in and month out is a dead end street and provides no increase in your wealth and actually depletes it.  Inquiring about and gaining the knowledge will go a long way in potentially enabling you to purchase your first or move-up home. If you need any assistance, feel free to reach out to me at anytime.

*Credit to Derek Kamm of Green River Mortgage (631) 327-5507 for some of my content.

Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 40 years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S) as well as the new “Green Industry” Certification for eco-friendly construction and upgrades. For a “FREE” 15 minute consultation, a value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: [email protected] Just email or snail mail (regular mail) him with your ideas or suggestions on future columns with your name, email and cell number and he will call or email you back.

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