If you’ve ever applied for a mortgage, chances are Fannie Mae and Freddie Mac played a role in your loan – most likely, without you ever realizing it. You can’t borrow from Fannie Mae or Freddie Mac directly, but these government-sponsored enterprises profoundly influence lender requirements, which in turn impact most homebuyers, too.
Fannie and Freddie set standards for how conventional, conforming mortgages are structured and who qualifies for them. Like the Federal Housing Administration (FHA), they offer programs that set more relaxed loan requirements for lower-income buyers.
What’s the purpose of these organizations? How do they guide lenders? And what do they mean for your mortgage payment? We explain their roles here.
Key Takeaways:
- You don’t borrow from Fannie Mae and Freddie Mac directly; they buy loans from lenders and turn them into mortgage-backed securities.
- Fannie and Freddie set the standards for conventional, conforming mortgages, encouraging specific borrowing requirements and influencing interest rates.
- The FHA’s role in the mortgage market is to insure loans made by approved lenders, reducing lender risk and making it easier for more borrowers to qualify.
- Fannie, Freddie and the FHA work differently, but each offers programs that loosen borrowing standards for low- and moderate-income buyers.
What Are The Roles Of Fannie Mae And Freddie Mac?
In the context of mortgages, you’ll often hear the names Fannie Mae and Freddie Mac. No, Fannie and Freddie aren’t actual people who make lending decisions. They’re not direct lenders, either. Rather, they’re government-sponsored enterprises (GSEs) created by Congress to purchase home loans from financial institutions.
Fannie and Freddie influence lenders by setting minimum borrowing standards for loans that they’d be willing to buy. Though borrowing requirements are ultimately up to lenders, banks follow Fannie’s and Freddie’s standards so the loans they originate are eligible for purchase. Banks want GSEs to buy their mortgages because it restores their cash flow, allowing them to make new loans to new customers. Homebuyers who meet Fannie’s and Freddie’s standards are considered lower risk, so they may receive lower interest rates. And just as the government intended, the housing market stays afloat.
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How Fannie Mae And Freddie Mac Support The Secondary Mortgage Market
Fannie Mae and Freddie Mac work differently from direct lenders who issue mortgages to borrowers. The primary role of these GSEs is to provide stability to the U.S. housing market. They do so by purchasing mortgages from lenders and packaging them into a bundle of home loans known as mortgage-backed securities. The mortgage-backed securities are then sold to investors, who earn a share of the homeowners’ monthly mortgage payments.
Investors find these mortgage-backed securities attractive, partly because Fannie Mae and Freddie Mac guarantee the loans. If a homeowner fails to pay the monthly mortgage payment, the GSEs pay the investor. Lenders benefit, too: By buying loans, Fannie Mae and Freddie Mac pay the bank immediately, reducing the risk lenders take on. This generally results in more affordable, standardized mortgage rates for borrowers.
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What Types Of Loans Do Fannie Mae And Freddie Mac Purchase?
Fannie Mae and Freddie Mac purchase conventional, conforming loans from banks. Conventional mortgages are loans that are not insured by the government. If the borrower defaults, the lender assumes the risk.
Conforming mortgages are loans that meet the standards set by Fannie Mae and Freddie Mac. Conforming loans are conventional loans, but not all conventional loans (for example, jumbo mortgages) are conforming.
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How Conforming Loans Work
While Fannie Mae and Freddie Mac set borrowing standards for conventional, conforming mortgages – roughly half of U.S. mortgage originations – you can’t apply to Fannie Mae or Freddie Mac for a mortgage. If the GSE buys your mortgage from a lender, the only change that may occur is that you’ll end up paying a new loan servicer (Often, Fannie and Freddie will pay your original lender to service the loan, so that may not even change). Your loan terms, monthly payments and interest rate all remain the same.
Fannie Mae and Freddie Mac buy mortgages issued by banks for primary homes, second homes, investment properties and refinances. They set borrowing standards for conventional, conforming loans to be eligible for purchase, which lenders pass on to borrowers. The GSEs mandate minimum credit scores, debt-to-income ratios and income standards. To qualify, mortgages must also conform to specific loan amounts, which are set by the Federal Housing Finance Agency (FHFA) and can change from year to year.
For 2026, the conforming loan limit for a typical one-family home is:
- $832,750 in most parts of the U.S.
- $1,249,125 in high-cost areas (specific counties where 115% of the area’s median home price exceeds the baseline conforming loan limit)
- $1,873,675 in Alaska, Guam, Hawaii and the U.S. Virgin Islands
Mortgage loans that exceed these limits are considered jumbo loans and will remain funded and held by private lenders.
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Borrower Standards Set By Fannie Mae And Freddie Mac
It’s in lenders’ best interests to write mortgages that meet GSE standards, because once Fannie Mae or Freddie Mac purchases a loan from a bank, the lender’s default risk immediately drops. The sale of a loan restores the bank’s cash flow, allowing lenders to issue new loans and profit from additional borrowers. Homebuyers who meet Fannie and Freddie conforming mortgage standards are seen as less risky, so they may benefit from loans with lower interest rates.
Fannie Mae or Freddie Mac qualifications for conventional, conforming loans include:
- Borrowers with good credit scores (generally speaking, 620 or higher)
- Borrowers with debt-to-income (DTI) ratios meeting GSE guidelines (generally around 36%, but it’s possible to get approved with a DTI of up to 50% in certain cases)
- Proof of income and employment
- A minimum down payment (can be as low as 3%, but some lenders may require more)
- A mortgage amount that doesn’t exceed the conforming loan limits set by the Federal Housing Finance Agency
What Happens If Fannie Mae Or Freddie Mac Purchases Your Mortgage?
By law, you must be notified when your mortgage is sold, and that includes loans sold to Fannie Mae or Freddie Mac. When this happens, nothing really changes for you. The terms of your loan, including your repayment period, monthly payment and interest rate, all stay the same. Even if your mortgage is sold to Fannie Mae or Freddie Mac, your lender often continues to handle the payments, so you’ll likely keep paying the same company unless you’re told otherwise.
The Role Of The Federal Housing Administration (FHA) In Mortgage Lending
The Federal Housing Administration (FHA) is a U.S. government agency within the Department of Housing and Urban Development (HUD). Like Fannie Mae and Freddie Mac, the FHA is not a direct lender and doesn’t write loans. Instead, it insures loans made by FHA-approved lenders.
By insuring loans, the FHA protects lenders. As a result, borrowers pay FHA mortgage insurance premiums in addition to the loan principal and interest. Mortgage insurance premiums can be paid up front or rolled into the loan and paid monthly. Unlike with Fannie Mae or Freddie Mac mortgages, which are sold by the lender to the GSE after closing, borrowers seek out and apply for FHA-backed loans with FHA-approved lenders. FHA loans typically have looser borrowing requirements than conventional, conforming loans.
How FHA-Insured Loans Work
FHA loans are mortgages made by private lenders that are insured by the FHA. Such loans can be used to purchase homes, refinance or make home improvements.
Like conventional, conforming loans set by Fannie Mae and Freddie Mac, FHA loans have limits depending on the type of property you’re looking to buy and where it’s located. Here’s what this year’s FHA loan limits look like:
| Property Type | Regular Limit | High-Cost-Area Limit |
|---|---|---|
| 1 unit | $541,287 | $1,249,125 |
| 2 units | $693,050 | $1,599,375 |
| 3 units | $837,700 | $1,933,200 |
| 4 units | $1,041,125 | $2,402,625 |
Borrower Standards For FHA-Insured Mortgages
FHA loans are typically more flexible than conforming loans, making them a good option for borrowers who may not qualify for a conventional mortgage. They’re government-insured, so if a borrower defaults, the FHA pays the lender. To qualify for an FHA-backed loan, you’ll need:
- A minimum credit score of 580 for a 3.5% down payment; you can qualify with a credit score of 500 to 579 if you make a 10% down payment
- A DTI of 43% or lower, though some lenders may accept a higher DTI
- Proof of income and employment
- A loan amount that doesn’t exceed the FHA limits
Fannie Mae And Freddie Mac Programs Are Designed To Expand Access To Homeownership
Like the FHA, Fannie Mae and Freddie Mac have programs for low- and moderate-income borrowers. They work differently from the FHA in several ways.
Fannie Mae’s HomeReady® Loans: Like an FHA loan, this Fannie Mae–designed program offers lower-income buyers the opportunity to purchase homes. Unlike FHA loans, HomeReady® mortgages are not government-insured.If a homeowner defaults, the lender assumes the risk. HomeReady®-eligible loans require:
- A down payment minimum of 3%
- A minimum credit score of around 620
- A DTI of no more than 50%
- Proof of employment
- Homeownership education
As with standard conforming mortgages, you don’t apply for a HomeReady® mortgage through Fannie Mae – you work with a HomeReady®-approved lender (a bank, credit union or mortgage company). The lender will determine if you meet HomeReady® requirements and approve or reject the loan.
Freddie Mac’s Home Possible®: This Freddie Mac program works much like Fannie Mae’s HomeReady®, only it’s offered through Freddie Mac. Like HomeReady®, Home Possible® is a conforming loan created to help make homeownership accessible to first-time or low- and moderate-income borrowers. Home Possible® loans are not government-insured. The program requires:
- A 3% down payment
- Credit scores around 620
- There is no DTI maximum, but generally borrowers should aim for less than 50%
- Proof of employment
- Homeownership education for first-time homebuyers
Conventional Vs. FHA Loans: Key Differences For Borrowers
There’s no one-size-fits-all answer to finding the right mortgage loan. No matter which loan you choose – conventional, FHA or loans offered through GSE programs – you and your lender will want to weigh these factors:
Credit Score
Although there isn’t an official minimum credit score requirement for conventional, conforming loans, lenders tend to impose higher requirements than they would for FHA loans. If you have a lower credit score, an FHA loan could be a good option because you can qualify with a minimum credit score of 500. If you meet the requirements for a conventional, conforming loan and have a good credit rating (lenders generally require 620 or higher), you could be rewarded with competitive interest rates.
Down Payment
Although the minimum down payment for a conventional, conforming loan is 3%, many lenders may require a down payment of 5%, 10% or even more. If you can’t make a 20% down payment, you’ll generally have to pay private mortgage insurance (PMI).
The minimum down payment for an FHA loan is 3.5% with a credit score of at least 580. With a credit score of 500 to 579, you’ll need to make a minimum 10% down payment. Though that’s higher than the minimum 3% down payment on GSE loans, you may struggle to qualify for a Fannie Mae and/or Freddie Mac program with a score in that range or be penalized with high interest rates if you do.
Loan Limits
FHA loan limits vary by location and property type. However, in many regions, they’re lower than Fannie Mae’s and Freddie Mac’s standard borrowing limits.
Mortgage Insurance
With a conventional, conforming loan, you’ll typically only have to pay PMI if you don’t make a 20% down payment. With FHA loans, there’s always a mortgage insurance requirement. In addition to an upfront mortgage insurance premium of 1.75%, FHA loans charge ongoing premiums that can make your monthly payments more expensive. However, the ongoing monthly MIP is canceled after 11 years if the borrower makes a down payment of 10% or more.
Property Type
Conventional, conforming loans are available for borrowers who want to buy a second home. FHA loans and loans offered through special GSE programs can be used only to finance a primary residence.
Refinancing Options
Loan programs offered by Fannie Mae and Freddie Mac allow borrowers to refinance, as do FHA loans. FHA loans offer a streamlined refinance option with minimal documentation (and, in some cases, no appraisal) that can make the process easier for borrowers. GSE programs and standard conforming loans often have low-cost refinance options, some requiring just a small amount of home equity. But ultimately, the options are determined by the lender.
FAQ
The Bottom Line: Choosing The Right Loan
You may be wondering whether you should apply for a conventional, conforming loan, an FHA loan, or a loan through the HomeReady® or Home Possible® programs.
You may want to consider a standard, conventional loan if you have excellent credit, have funds for a 20% down payment, or are looking to buy a vacation home or investment property. You should consider an FHA, HomeReady® or Home Possible® loan if you don’t have strong credit, you don’t have a lot of money for a down payment or you’re a first-time buyer looking for a primary residence.
No matter what loan type you choose, make sure to shop around with different lenders. That’s the best way to know if you’re getting the right loan for you.
Maurie Backman
Maurie Backman has more than a decade of experience covering personal finance topics that include mortgages, loans, retirement, Social Security, and investing. Prior to becoming a full-time writer, she worked in the financial industry as well as in product design and marketing. Maurie holds a bachelor's degree from Binghamton University, where she studied creative writing and finance. She was happy to combine her two areas of study into a career that allows her to educate consumers on a host of financial topics.
