What to Look For When Shopping For Loan - What Are Fannie Mae - Freddie Mac - FHA HUD and VA Loans - Government Assistance For First Time Home Buyers

March 25th 2006

What to Look For

The good thing about loan programs is that there are so many loans to choose from. The bad thing about loan programs is that there are so many loans to choose from. So how do you decide what loan fits you best?

If you have at least 3% of the loan amount for a down payment, you might consider the most common type of loan, a conventional loan. These are conforming loans, which are secured by government sponsored entities (GSE) such as Fannie Mae (FNMA), and Freddie Mac (FHLMC). Jumbo loans (or loans for large amounts of money) must be funded by private investors. Jumbo loans exceed the amounts set by GSE’s.

Fannie Mae and Freddie Mac are considered secondary market lenders. Retail lenders will actually receive their funds from a secondary market lender.

These agencies are actually private shareholder-owned companies that work with lenders to make sure they don't run out of mortgage funds. Fannie Mae does this by purchasing loans from lenders, and then they hold those mortgages in their portfolio. This frees-up more money so the lenders can lend more money.

Fannie Mae also offers what are known as Mortgage-Backed Securities (MBS) in exchange for pools of mortgages from lenders. According to Fannie Mae, these securities are “highly liquid investments” and are traded on Wall Street.

Freddie Mac and Fannie Mae both work in a similar fashion. They were created via congressional charter, but have since become private corporations. The actual lender (sometimes referred to as the retail lender) will make money on fees, points and other charges.

Ginnie Mae (GNMA) does not buy or sell loans. They issue no stocks or mortgage backed securities (MBS). Ginnie Mae acts more like an insurance company. They guarantee investors timely payments of principal and interest on MBS backed by federally insured or guaranteed loans. They mainly work with the Federal Housing Administration (FHA), Department of Agriculture's Rural Housing Service (RHS), the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH) and the Department of Veterans Affairs (VA).

According to Ginnie Mae, their securities are the only MBS to carry the full faith and credit guaranty of the United States government. This means that even in difficult times, an investment in Ginnie Mae MBS is one of the safest investments that an investor can make.

The FHA acts as an insurer as well. They are part of the Housing and Urban Development (HUD) department. HUD helps low income families qualify for loans they would otherwise not qualify for. If home buyers meet certain FHA requirements, the department will guarantee the loans made by lenders. If the homebuyer defaults on the loan, HUD pays off the lender and puts the home up for sale, usually using specific brokers around the country.

I hope that helps explain the alphabet soup of terms that many borrowers and homebuyers may encounter.