A home buyer is Fannie Mae eligible when the government-backed company will buy their mortgage from a lender. A lender — a bank like Chase or Wells Fargo — will provide the mortgage to the home buyer. Fannie Mae will then buy the mortgage from the lender.
Being Fannie Mae eligible depends on a buyer’s financials and the home they’re buying. In this article, we cover the factors that determine whether Fannie will back a mortgage. We also cover the benefits of Fannie backing a mortgage.
Conforming loan limit
Fannie Mae only backs loans below a certain price. For 2021, this number in NYC is about $822,000. This is the conforming loan limit. For jumbo loans, any mortgages exceeding the conforming loan limit, a bank cannot get Fannie’s backing. The ceiling is lower in areas cheaper than New York.
A bank may still lend to a buyer for mortgages too expensive for Fannie. These loans, which the lender keeps on their own books, are called portfolio loans.
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Other home details that determine Fannie Mae eligibility
There are other aspects besides price that determine whether a home is Fannie Mae eligible. For example, for condos, the building must have already sold 50% of its units. Reaching this milestone signals to Fannie that a mortgage in the building is a relatively safe investment.
Fannie Mae also screens for the structural integrity of the home. It will not back homes that have inadequate plumbing, electrical wiring issues, or roof leaks.
The buyer must also meet certain standards to be Fannie Mae eligible. For example, a buyer’s debt-to-income ratio must usually be below 36%. This means the buyer pays at most 36% of their gross monthly income to debts. Debts will include the mortgage but also student loans, car loans, etc. The debt-to-income ratio limit may be as high as 45% for buyers with great credit.
Credit scores are another important metric. Single-family home buyers need a FICO score of 620 for fixed-rate loans, 640 for adjustable-rate mortgages.
The buyer usually needs cash reserves of six months, meaning they have savings to cover the mortgage in case of emergency. They should also have two years of stable employment history and be able to make a down payment of at least 3%, usually 10 or 20.
There are exceptions to these rules, but they are the standard guidelines.
The benefits of being Fannie Mae eligible
The main benefit of being Fannie Mae eligible is simply that lenders will be more willing to give the buyer a mortgage. Lenders want Fannie to back their loans to lower their own risk.
Other benefits are that Fannie-backed loans tend to have lower interest rates and low down payment requirements. This is precisely because the lender is taking on less risk.
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Top photo courtesy of Quay Tower.