What Is Best For Your Mortgage Application? Fannie, Freddie, FHA?

March 31st, 2010

Which type of loan is best for your refinance mortgage or purchase mortgage?

Each of the three main types of mortgages–Fannie Mae, Freddie Mac, and FHA–has benefits for borrowers, but determining which is best depends on several factors.

The Conventional Loans: Fannie Mae and Freddie Mac

Long the leader in mortgage fundings in the United States, the Fannie Mae mortgage continues to be the loan of choice for most mortgage applications. Easy-to-understand guidelines, low mortgage rates and familiarity by lenders results in most conventional mortgage applications being approved and funded with Fannie Mae products. Fannie Mae has tightened its underwriting guidelines in the past few months, lowering the debt-to-income ratio ceiling for refinance mortgages and purchase mortgages and raising minimum credit score requirements. Fannie Mae has positioned itself as the “A+” lender for new home loan applications.

Fannie Mae’s little brother has long been known to be a bit more forgiving with underwriting guidelines. Lower credit score requirements and higher debt-to-income ratios still provide programs for borrowers who do not meet Fannie Mae’s stricter underwriting guidelines. As well, Freddie Mac allows for what is known as “blended ratios” for mortgage applications that include non-occupant co-borrowers–for example, parents co-signing on a purchase mortgage application for their children. Many mortgage lenders have different pricing for Freddie Mac mortgages than Fannie Mae mortgages, and the mortgage rate may be slightly higher.

FHA Mortgages

Backed by a government-run mortgage insurance pool, FHA mortgages have long been considered the mortgage of choice for borrowers who are more challenged in qualifying for a new home loan. Lower down payment requirements, more liberal qualifying guidelines, and the allowance of co-borrowers are all factors that have helped FHA loans be the mortgage of choice for millions of Americans. With the tightening of credit guidelines across the board and the virtual elimination of second mortgages for low- or no-down purchases, applications for FHA home purchase and refinance mortgages have surged in the past few years.

Like Freddie Mac, FHA allows for non-occupant co-borrowers on loan applications. Unlike Fannie Mae or Freddie Mac, if you are considering a cash-out refinance to consolidate debt, FHA will fund a refinance mortgage up to 85% of your home’s value. All FHA mortgages have mortgage insurance, but if you’re looking for a low-down payment purchase mortgage–as low as 3.5% down–the FHA mortgage program is almost certainly the one for you. Many borrowers who are turned down for private mortgage insurance (PMI) on a conventional home loan are being approved with FHA mortgages.

Whether you are completing a mortgage application for a refinance mortgage or a purchase mortgage, consider the different types of mortgages that may be available for your new home loan: Fannie Mae, Freddie Mac, or FHA.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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