Fannie Mae Loans: Do You Need A Cash Cushion?

Fannie Mae is a government-sponsored mortgage company that was established to make housing more affordable and accessible to the general public. It does not originate mortgage loans but instead keeps funds flowing to lenders by purchasing or guaranteeing mortgages issued by credit unions, banks, and other financial institutions. Fannie Mae has specific eligibility requirements for mortgage approval, including a minimum credit score of 620 for fixed-rate mortgages, a maximum debt-to-income ratio of 36%, and down payment requirements as low as 3%. While reserves are not generally required for primary residences, they may be needed for second homes and investment properties. So, does Fannie Mae require a cushion for its loans? Let's find out.

Credit score requirements

Fannie Mae requires a minimum credit score of 620 for fixed-rate mortgages. However, for adjustable-rate mortgages (ARMs), a higher minimum credit score of 640 is required. A higher credit score may be necessary for certain loan programs or to obtain better interest rates and lower private mortgage insurance (PMI) premiums.

Fannie Mae's HomeReady® program is designed for low- and moderate-income buyers, allowing them to qualify with a minimum credit score of 620. This program also offers lower mortgage insurance premiums compared to other Fannie Mae loan programs.

While a credit score of 620 is the minimum requirement, some lenders may require a higher score. Additionally, borrowers with a higher credit score may qualify for better mortgage rates. It is worth noting that Fannie Mae mortgages can be beneficial for clients with less-than-perfect credit scores.

To ensure the credit quality of financing, approved lenders must meet eligibility and underwriting criteria and comply with the Statement on Subprime Lending issued by the federal government.

Down payment minimums

Fannie Mae, short for the Federal National Mortgage Association, was founded in 1938 as part of the New Deal legislation by the US government. Its goal was to make housing more affordable and accessible to the general public.

Fannie Mae offers multiple loan programs with varying advantages and requirements. The minimum down payment for a Fannie Mae loan is 3% for a single-family home, as long as it's a primary residence. This is available through the HomeReady® and standard loan programs. The HomeReady® program is designed for low- and moderate-income buyers, allowing the down payment to be comprised of funds from multiple sources, including non-occupying relatives and friends.

For multi-family homes, the down payment requirements are higher. Previously, borrowers had to put down 15% for two-family homes and 25% for 3-4 family homes to secure a Fannie Mae Conventional Loan. However, Fannie Mae recently introduced a policy change, reducing the down payment requirement to 5% for multi-family homes.

It's important to note that while 3% is the minimum down payment required by Fannie Mae, some lenders may require a higher amount, such as 5% or more. Additionally, putting less than 20% down will result in the requirement for Private Mortgage Insurance (PMI), which will increase your monthly mortgage payment costs.

Fannie Mae also offers the CHOICERenovation program, which allows you to finance your home purchase and renovation costs in a single closing transaction.

Income and employment history

Fannie Mae, also known as the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise that was established in 1938 as part of the New Deal legislation. It works to ensure that mortgage lenders have access to capital and that borrowers can obtain affordable financing.

Fannie Mae has specific requirements for income and employment history that must be met for loan approval. Here are the key details:

• Two-Year Employment History: Fannie Mae typically requires borrowers to have a consistent two-year employment history. However, there may be exceptions for borrowers with less than two years of employment history if their employment profile demonstrates positive factors that offset the shorter income history.
• Income Verification: Borrowers must provide proof of income, such as pay stubs, W-2 forms, and tax returns. Self-employed individuals may need to provide additional financial documentation, such as business tax returns, to verify their income.
• Income Stability: Income from overtime or bonuses must be received for at least 12 months to be considered stable. Alimony and long-term disability income may also be accepted in some cases.
• Future Income: Borrowers will need to provide reasonable proof that their income will continue for at least three years after the loan is closed.
• Income Limits: The HomeReady loan program is the only Fannie Mae loan with income limits. Borrowers should check the income limits in their area to determine their eligibility.
• Debt-to-Income Ratio: Many lenders require borrowers to have a debt-to-income ratio (DTI) of no more than 45%. A lower DTI, below 36%, puts borrowers in a better position for loan approval.
• Minimum Income Requirements: To qualify for a Fannie Mae loan, borrowers' income must meet the program's requirements. This includes considering non-traditional income sources, such as alimony or long-term disability payments.
• Employment Information: Only actual employer information should be provided in the loan application. Terms like "retired" or "homemaker" should not be listed as the borrower's current employer.
• Self-Employment Considerations: If a borrower has an ownership share of 25% or more in a business, they are considered self-employed. Their income is then calculated based on net income (or loss) from self-employment and entered in the Monthly Income section.
• High LTV Refinance Loans: Fannie Mae offers a reduced level of income documentation for high loan-to-value (LTV) refinance loans. This means borrowers may not need to provide as much income verification for these types of loans.

In summary, while a two-year employment history is generally required, Fannie Mae does allow for flexibility in certain cases. It is important for borrowers to provide comprehensive documentation and demonstrate positive factors that offset any shorter income history or non-traditional employment situations.

Debt-to-income ratio

The debt-to-income ratio is a key consideration when it comes to Fannie Mae loans. This ratio is calculated by dividing a borrower's monthly recurring debts by their gross monthly income. A lower debt-to-income ratio is generally preferable, indicating that the borrower has a better handle on their finances.

Fannie Mae, also known as the Federal National Mortgage Association (FNMA), is a government-sponsored enterprise that works to ensure mortgage lenders have access to capital, and borrowers have access to affordable financing. While Fannie Mae does not directly offer mortgages to homebuyers, its loans are available for both single-family and multifamily homes.

Lenders typically prefer borrowers to have a debt-to-income ratio of no more than 36%, following the 28/36 rule. This means a household should spend no more than 28% of its monthly income on housing expenses and no more than 36% on debt servicing, including mortgages and car loans. However, Fannie Mae will accept a maximum debt-to-income ratio of 36%, which can be as high as 45% if the borrower has a strong credit score and meets reserve requirements.

A higher debt-to-income ratio may require the borrower to make a larger down payment to compensate, reducing their monthly costs. It's important to note that a higher credit score can also help qualify for a higher debt-to-income ratio, as it demonstrates the borrower's ability to manage their finances effectively.

Fannie Mae offers various loan programs with different requirements, such as the HomeReady® mortgage, which assists low- and moderate-income buyers with down payments as low as 3%. Additionally, the HomeStyle® Renovation mortgage allows borrowers to finance both the purchase and renovation costs of a home.

Property types

Fannie Mae offers financing options for a variety of property types, including single-family homes, townhouses, and condominiums. They also provide loans for multi-family properties, such as cooperatives, rural properties, and affordable housing.

For 2-4 unit properties, Fannie Mae permits conventional fixed-rate and adjustable-rate mortgages (ARMs). These properties can serve as primary residences, second homes, or investment properties, with at least one unit being owner-occupied for primary residences. The loan limits for these multi-unit properties are higher than for single-family homes, and the minimum credit score requirements vary depending on the intended use.

Fannie Mae also offers the HomeReady loan program, which is designed for low-to-moderate income borrowers. This program offers lower down payment requirements, flexible income guidelines, and reduced mortgage insurance costs. It is available for owner-occupied two-, three-, and four-unit properties, with specific loan limits for duplexes, triplexes, and fourplexes.

Additionally, Fannie Mae's guidelines allow for financing a home with up to four units in a regular subdivision, a co-op, condominium building, or a planned unit development (PUD). These properties must meet safety, soundness, and structural integrity standards, as well as comply with local building codes.

It's important to note that Fannie Mae does not directly provide loans to homeowners but instead buys and guarantees mortgages through the secondary mortgage market. They work with local real estate professionals to prepare, maintain, and list properties for sale, and their eligibility requirements cover a wide range of property types.

Frequently asked questions