4 Myths About Loan Types

4 Myths About Fannie, Freddie, and FHA Loans

When trying to get the lowest down payment and the best loan rate, you’ll hear a lot about Fannie Mae, Freddie Mac, and FHA loans.  However, people are often confused about these loan types.

Myth #1: FHA loans are only for low income people:

Not true!

A FHA or Federal Housing Administration loan is not for low income people.

It is a loan backed by the federal government that allows home buyers, with a low credit score or with little money to put down on a home, to qualify for a loan.

In fact, FHA loans don’t have any income limits, and if are interested in purchasing investment property, and you plan on living there FHA will allow 3.5% down. YES 3.5% down on units!

Myth #2: Fannie Mae and Freddie Mac are government agencies:

Not true.

Fannie Mae (FNMA) and Freddie Mac (FHLMC) started out as government agencies but are now privately held mortgage companies that work closely with the Federal Government and carry an implied government guarantee.

The government originally established FNMA and FHLMC to create a more stable mortgage market and grow home ownership by buying mortgages from the banks. This is called “securitization.” Securitization freed the banks to lend out more money and incur more risk.

Fannie Mae was converted into a privately held company in 1968, and Freddie Mac was converted in 1989.

Myth #3: Fannie Mae and Freddie Mac give loans to low income people:

Not true.

You cannot get a loan directly from Fannie Mae and Freddie Mac.

However, historically, Fannie Mae and Freddie Mac have helped low and middle income buyers purchase homes; not because they give them the loans directly, but because they allow the banks to take on more risk.

That is, by purchasing mortgages from the banks, Fannie Mae and Freddie Mac allow the banks to give loans to people with less disposable income.

Myth #4: Fannie Mae and Freddie Mac are not conventional loans.

True and Not True.

Remember you cannot get a loan directly from Fannie Mae or Freddie Mac, however, the banks want to free up their cash by bundling their loans and selling them to Fannie Mae and Freddie Mac.

To do this, the lenders have to follow the rules that Fannie and Freddie set for loans; and they pass these rules on to you.

Because of this, the terms “Fannie Mae,” “Freddie Mac,” and “conventional” are often used interchangeably.

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