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Understanding Fannie Mae Guidelines

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If you’re shopping for a mortgage, you probably already know lenders have certain guidelines for the size of a loan they’ll give you, the down payment you’ll need and the credit score they’d prefer.

These guidelines aren’t random, and lenders don’t set them on a whim. Instead, they’re usually based on guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises in Washington, D.C., that are actually private companies.

Fannie Mae and Freddie Mac don’t offer mortgages directly, but they set guidelines and limits on the types of loans they’re willing to buy and guarantee as part of their overall mission of making American mortgages more available, affordable and less risky to lenders.

We’ll get to the specifics later. In the meantime, it helps to know the guidelines that Fannie Mae and Freddie Mac set serve as benchmarks for the vast majority of conventional mortgages offered by private lenders. If you’re in the market for a private loan, your loan will most likely conform to guidelines set by these two sister companies; and unless it’s a very large jumbo loan, it will be considered a conforming loan.

Fannie Mae and Freddie Mac operate in similar ways, but Fannie Mae is the larger company. Read on to learn more about the standards Fannie Mae sets and two loan programs it backs that are designed to help buyers pay for a down payment or buy a home that needs renovating.

What is Fannie Mae?

The official name of Fannie Mae is the Federal National Mortgage Association. It was created in the late 1930s by the federal government with the goal of reviving and helping stabilize a housing market weakened by the Great Depression. In 1968, Fannie Mae became a private corporation, although as a government-sponsored enterprise, or GSE, one of its missions is to buy individual mortgages from lenders, package them and sell them to investors on the secondary market. This gives lenders money to grant more mortgage loans, thereby both growing and stabilizing the mortgage market.

During the Great Recession of 2008, both Fannie Mae and Freddie Mac came under scrutiny for their roles in the ensuing mortgage crisis and were placed under federal oversight.

Today, the Federal Housing Finance Agency sets limits for the loans that Fannie Mae and Freddie Mac are willing to buy and resell, and loans that meet these guidelines are called conforming loans. Lenders prefer to work with conforming loans because they can be more readily sold into the secondary mortgage market, so the loans carry less risk. Borrowers, meanwhile, benefit from conforming loans because they typically offer the best interest rates to those who have strong credit.

What requirements must you meet for a conforming mortgage loan?

In the chart below, you’ll see the basic eligibility requirements that Fannie Mae sets for a loan to qualify as conforming. These requirements are for loans used for single-family homes that serve as primary residences.

Fannie Mae has different requirements for loans used to buy multi-unit homes (2-4 units), second homes, investment properties, manufactured homes, loans used for cash-out refinances and those underwritten through Fannie Mae’s automated processing system. You can go here to see requirements for all the loans described above and consumer loans available through two Fannie Mae-branded programs, HomeReady and HomeStyle Renovation mortgage.

Down payment 3% for fixed-rate mortgages; 5% for adjustable-rate mortgages
Credit score 620 for fixed-rate mortgages; 640 for adjustable-rate mortgages
Debt-to-income ratio 36% or 45% for borrowers with higher credit scores; 50% for loans processed with Fannie Mae’s automated processing system
Loan limit $484,350 for low-cost areas; $726,525 for high-cost areas; Higher limits for Alaska, Guam, Hawaii and U.S. Virgin Islands

Understanding Fannie Mae’s down payment requirements

A down payment is the amount required upfront to purchase a home. It’s calculated as a percentage of the home’s purchase price. So, for a $200,000 home, a 20% down payment means a borrower would have to come up with $40,000 at the time of closing.

To understand Fannie Mae’s down payment requirements, you’ll have to look at the loan-to-value (LTV) ratios the company sets for different conforming loans according to terms and borrower requirements. For borrowers looking to buy a single-family home, the maximum LTV ratio for most Fannie Mae loans is now 95%, which means a borrower would need a minimum down payment of 5%.

If down payment worries are on your mind, it may help to know that Fannie Mae backs low-down-payment mortgages through its HomeReady loans, which are offered to low- and middle-income buyers and first-time buyers. For these loans, the minimum down payment is just 3% (based on an LTV ratio of 97%), instead of 5%. One thing to keep in mind with this type of loan: If your down payment is less than 20% of the price of your new home, most lenders will require you to buy private mortgage insurance.

Understanding Fannie Mae’s credit score requirements

Your credit score is an important indicator of your financial health, and it’s taken into account in virtually all mortgage loans. Your score is based on your documented ability to repay any debt you owe, including for credit cards, student loans and car payments.

For a loan with the best possible interest rate, consider trying to raise your credit score before looking for a new home. For the conforming loans it’s willing to buy, Fannie Mae requires a minimum 620 credit score for fixed-rate mortgages and a 640 credit score for adjustable-rate mortgages.

Understanding Fannie Mae’s debt-to-income requirements

Your debt-to-income ratio, or DTI, is a calculation of how much you owe in debts compared with how much you earn. This number is used by lenders to see how much debt you can comfortably take on, and it relies heavily on the stability and continuity of your monthly income.

Fannie Mae’s DTI guidelines specify that borrowers need to have a stable, continuous income. If you change jobs a lot, you can still qualify for a conforming loan as long as your income stream remains the same. If your income varies — possibly because it depends on factors such as varied hours, overtime or bonuses — you may be able to qualify for a Fannie Mae loan as long as you can provide at least two years of documentation.

The maximum debt-to-income (DTI) ratio allowed for a Fannie Mae loan for a single-family home is usually 36%. However, your DTI it can be as high as 50% under certain conditions. For example, if your credit score is 660, you’d need at least a 25% down payment and to show you have six months’ worth of financial reserves, such as bank savings or stock investments, on hand. If you have no reserves on hand — and expect to put down less than 25% —  you’d need a credit score of 720 to qualify for the higher DTI limit.

Understanding Fannie Mae’s loan limit requirements

Fannie Mae and Freddie Mac set limits for the size of mortgages they will guarantee. This number, called the conforming limit, changes from year to year and is based on changes in the mean home price. If you want a mortgage for a larger amount, you’ll be in the market for a nonconforming loan, sometimes called a jumbo loan.

For 2019, the single-family loan limit for low-cost areas is $484,350. For high-cost areas, the limit is $726,525. Check these limits before you apply for a mortgage, as conforming loans usually offer the best interest rates.

The bottom line

If you’re applying for a mortgage, it helps to understand that loan terms aren’t set in an arbitrary, finger-in-the wind way. Fannie Mae loan standards are aimed at making the financing process more predictable and less risky for both consumers and lenders, and if your conventional loan conforms to these standards, you may also be able to qualify for the best interest rate.

If you’re a first-time buyer looking for help with a down payment, you might want to consider Fannie Mae’s HomeReady program. Similarly, if you’re looking for a mortgage for a home that needs work, consider looking into Fannie Mae’s HomeStyle Renovation loan, which provides a way to pay for home improvement costs without having to take some other type of financing, such as a second mortgage or home equity line of credit.

Talk to a trusted lender about whether a conventional loan might be right for you and how you can improve your chances of getting a loan with the best rate. If you don’t qualify for a conventional loan, consider a loan backed directly by the federal government, such as an FHA, USDA or VA loan. These loans typically come with less stringent requirements for down payments, documentation and credit scores.

The information in this article is accurate as of the date of publishing.


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