How Do Fannie Mae and Freddie Mac Loans Work?

How Does Fannie Mae Work?

Fannie Mae, short for Federal National Mortgage Association, primarily buys conventional loans from larger banks and lenders.

By standardizing loan requirements, Fannie Mae helps promote mortgage availability and stability. When a mortgage meets Fannie Mae's criteria, a lender can sell that loan to Fannie Mae in order to free up funds needed to issue more loans. This system keeps mortgage markets liquid and interest rates competitive for borrowers.

How Does Freddie Mac Work?

Freddie Mac, or the Federal Home Loan Mortgage Corp., tends to buy conventional loans from smaller banks and lenders.

As with Fannie Mae, Freddie Mac has the same objective of ensuring that lenders have access to capital so they can continue offering loans to homebuyers. Freddie Mac's guidelines—again, like Fannie Mae's—help standardize mortgage products and make it easier for lenders to offer competitive rates and terms.

Fannie Mae vs. Freddie Mac

Both Fannie Mae and Freddie Mac aim to make homeownership more accessible by supporting lenders and offering low down payment programs for eligible borrowers. Loans that adhere to their requirements are called conforming loans, and they're the most widely used type of mortgage in the U.S.

While Fannie Mae and Freddie Mac are similar in many ways, there are some minor differences. Here's a quick comparison of some key information and each organization's requirements:

Why Do Fannie Mae and Freddie Mac Exist?

Fannie Mae and Freddie Mac were both created by Congress to support the U.S. housing finance system.

By purchasing mortgages and either holding them or selling them to investors, Fannie Mae and Freddie Mac free up cash for banks, mortgage companies and other lenders to finance home purchases. This also helps keep down interest rates and stabilizes the lending market.

Fannie Mae was established in 1938, and Freddie Mac in 1970. They're structured such that the federal government guarantees they won't default on their debt.

Alternatives to Fannie Mae and Freddie Mac

If a Fannie Mae- or Freddie Mac-guaranteed conforming loan doesn't meet your needs, you do have other options. Here are a few alternatives:

• FHA loans: FHA loans are backed by the Federal Housing Administration (FHA) and are designed for homebuyers with lower credit scores. You may be able to get approved with a score as low as 500 with a 10% down payment or 580 if you put 3.5% down.
• VA loans: VA loans, backed by the U.S. Department of Veterans Affairs, are available to eligible active-duty members of the military, National Guard and Reserve members, military veterans and surviving spouses. In many cases they do not require a down payment.
• USDA loans: USDA loans are offered through or backed by the U.S. Department of Agriculture (USDA). They're designed for low- and moderate-income borrowers looking to buy a home in an eligible rural area.
• Jumbo loans: A jumbo mortgage exceeds the borrowing limits set by Fannie Mae and Freddie Mac for a conventional loan (loans not backed by the government). In most of the U.S., the borrowing limit for 2025 is $806,500. In high-cost regions, the limit for 2025 is $1,209,750.
• Other non-conforming loans: These loans don't meet other conforming loan standards set by Fannie Mae and Freddie Mac. A few examples include hard money loans, interest-only mortgages, seller financing and holding mortgages.

The Bottom Line

Fannie Mae and Freddie Mac play a vital role in making homeownership possible for millions of Americans. By supporting lenders and standardizing mortgage requirements, they help keep interest rates competitive and loan programs accessible to a wide range of borrowers.

Before you apply for a mortgage, it's important to understand your options, compare loan types and make sure you're choosing the best fit for your financial situation. It's also important to get your finances in order before applying. You can check your credit report and FICO^® Score^Θ for free from Experian to see where your credit stands.