Often the media refers Fannie Mae and Freddie Mac when talking about mortgages. So, just exactly what are these two entities, and what do they do?
Fannie Mae and Freddie Mac are intermediaries between lenders and companies that invest in mortgage-based securities. Officially, Fannie and Freddie are known as Government Sponsored Enterprises (GSEs), and they are overseen by the federal government.
GSEs are important to you
How does this affect you? Basically, whenever you get a mortgage, Fannie and Freddie are likely involved.
Your lender often gives you a mortgage with the intention of selling it to one of these GSEs. Fannie and Freddie take these mortgage loans, bundle them, and sell many of them to investors as what are called Mortgage Backed Securities (MBSs).
MBSs may contain thousands of mortgages and are generally categorized by criteria such as type of mortgage, credit profile of the borrower, or the term of the loan. They may be sold multiple times, as they often are traded from investor to investor.
The process is circular: Money flows from the investors to Fannie and Freddie, and ultimately to the lenders, who then fund additional loans with this money. The lenders then send these loans to Fannie or Freddie to bundle it and send to investors. Investors then send Fannie and Freddie more money to buy more loans.
Fannie and Freddie are also instrumental in the mortgage process in that they write the guidelines that both lenders and investors use when transacting loans.
Buyers – both first-timers and seasoned – seem to have more questions about credit than any other topic in the finance process. As your credit plays a really important role in whether or not you qualify for a mortgage, here are some credit basics you should be aware of.
Your all-important “credit score” is actually the middle score assigned by the three credit bureaus: Trans Union, Experian, and Equifax. These companies collect credit information from creditors and have what are called scoring models. This information is reported to lenders and others who request it.
There are many components that make up a credit score; however, two of these components are of the utmost importance to you as a mortgage consumer: recent payment history and balance-to-limit ratios.
Recent payment history is just as it sounds, and tells potential lenders that you are able to manage the debt you currently have. This is an extremely important factor in their decision about whether you are able to take on additional mortgage debt.
A balance-to-limit ratio compares your overall credit card balances to their limits. Even if you are making your payments on time, you still may be over-extended; your balance should be 30 percent or less of limits.
If you are planning on financing a home, you may want to sit down and figure out where you are, particularly as it relates to the two previously mentioned important items: balance-to-limit ratios and payment history. If need be, pay down some credit card debt, and/or make sure you’re paying your bills on time.
Keep in mind the fact that bureaus can take up to 30 days to report credit information. You should make changes before you apply for a mortgage, so new (positive) information will be reflected when your lender pulls your credit data.
Your mortgage professional can help you with additional details regarding your credit.