Is Fannie Mae an FHA Loan? Breaking Down the Key Differences

Fannie Mae and FHA loans are two common options for homebuyers, but they actually have some important distinctions. While both offer more flexible underwriting standards than conventional loans, Fannie Mae is not an FHA loan. Understanding the key differences between Fannie Mae and FHA loans can help you determine which is the better fit for your situation.

What is Fannie Mae?

Fannie Mae, also known as the Federal National Mortgage Association, is a government-sponsored enterprise. This means that while Fannie Mae operates as a private company, it has a congressional charter and works to increase liquidity in the mortgage market.

Fannie Mae does not directly lend money to homebuyers. Rather, it works with lenders by purchasing loans that meet its underwriting standards. This gives lenders more capital to issue new mortgages. Fannie Mae packages the loans it purchases into mortgage-backed securities that it sells to investors.

Fannie Mae Underwriting Guidelines

While more flexible than those for conventional loans, Fannie Mae does have specific underwriting standards for the loans it will purchase. These include

• Minimum credit score of 620 for most loans, with options for scores as low as 620 with additional conditions
• Maximum debt-to-income ratio of 50%
• Down payments as low as 3% with mortgage insurance

Fannie Mae offers both fixed-rate and adjustable-rate mortgages. It purchases loans for single-family homes condos manufactured homes, and 2-4 unit properties.

What is an FHA Loan?

FHA stands for the Federal Housing Administration, which is a government agency within the Department of Housing and Urban Development (HUD) The FHA insures mortgage loans made by approved lenders, protecting them from losses if borrowers default

In exchange for lower borrowing standards, FHA loans require an upfront mortgage insurance premium and annual premiums. FHA loan limits vary by area but reach up to $970,800 in the most expensive markets.

FHA Underwriting Guidelines

Here are some of the key guidelines for FHA loans:

• Minimum credit score of 500 with a 10% down payment
• Maximum debt-to-income ratio of 57% with compensating factors
• Down payments as low as 3.5%
• Allows non-occupant co-borrowers

The FHA offers fixed-rate loans as well as 3, 5, 7, and 10 year ARMs. Loans can be used for primary residences, multi-unit homes, and condos approved by HUD.

Key Differences Between Fannie Mae and FHA

While Fannie Mae and FHA loans fill similar needs in increasing mortgage availability, there are some notable ways in which they differ:

Down payments

• Fannie Mae requires at least 3% down for most loans
• FHA allows down payments as low as 3.5%

Credit scores

• Fannie Mae’s minimum credit score is generally 620
• FHA goes down to 500 with a 10% down payment

Debt-to-income ratio

• Maximum DTI is 50% for Fannie Mae
• FHA allows DTIs up to 57% with compensating factors

Mortgage insurance

• Fannie Mae loans require private mortgage insurance if less than 20% down
• FHA loans require upfront and annual mortgage insurance premiums

Loan limits

• Fannie Mae conforming loan limit for 2022 is $970,800
• FHA loans in high cost areas can go up to $970,800

Property types

• Fannie Mae purchases loans for single-family homes, condos, and 2-4 units
• FHA also insures loans for 3-4 unit properties

ARM options

• Fannie Mae offers more limited ARM term options
• FHA provides 3, 5, 7, and 10 year ARMs

Co-borrowers

• Fannie Mae limits non-occupant co-borrowers
• FHA permits non-occupant co-borrowers

Who Offers Fannie Mae and FHA Loans?

Since Fannie Mae works through lenders that meet its standards, most banks and mortgage companies will offer loans that can be sold to Fannie Mae. Lenders who participate in the FHA program can make loans eligible for FHA insurance.

Some of the most common types of lenders for Fannie Mae and FHA loans include:

• Banks – Local banks and national lenders like Wells Fargo often provide options for both.

• Mortgage brokers – Brokers have relationships with many lenders and can help you find Fannie or FHA loans.

• Credit unions – Most credit unions participate in programs to sell loans to Fannie Mae. Some also offer FHA products.

• Online lenders – Many online companies like Quicken Loans offer loans that can be Fannie eligible or FHA insured.

No matter where you get a Fannie or FHA loan, make sure to compare interest rates, fees, and other costs. Since both are available from so many lenders, it pays to shop around.

How Do I Know Which to Choose?

Deciding between a Fannie Mae or FHA loan depends mostly on your financial situation. Here are some quick guidelines on choosing one over the other:

• If you have a credit score below 620 or very high DTI, FHA is likely your only option.

• With a credit score between 620-659 or DTI over 50%, FHA may offer better rates and terms.

• If you have very low savings, FHA allows lower down payments.

• Fannie Mae may offer better ARM choices if you want a shorter-term adjustable loan.

• FHA allows co-borrowers who won’t live in the home, which Fannie Mae limits.

• For high balance loans over $647,200, Fannie Mae has higher limits than FHA.

For many borrowers, qualifying for either loan is feasible. In that case, comparing options from lenders for both programs makes sense. This can help you find the most affordable option.

Be sure to consider not just upfront costs like interest rates and fees but also long-term costs like mortgage insurance. Getting pre-approved makes it easy to compare Fannie vs. FHA loan offers side by side.

The Bottom Line

Fannie Mae and FHA loans both provide more flexible home financing than conventional loans. But Fannie Mae isn’t a government agency or FHA loan. While there is some overlap, Fannie Mae and FHA guidelines differ in areas like minimum credit scores, debt ratios, down payments, and loan limits.

Looking closely at the unique benefits of both programs for your situation allows you to determine if a Fannie Mae or FHA loan is the way to go. Considering both when mortgage shopping can open up your options for getting approved and keeping costs low.