How Do Fannie Mae and Freddie Mac Loans Work?

If you’re thinking about buying a home in the near future, you may have heard of “Fannie Mae” and “Freddie Mac” loans. Understandably, you might think Fannie Mae and Freddie Mac are two large, popular mortgage lenders.

However, these compIf you’re thinking about buying a home in the near future, you may have heard of Fannie Mae and Freddie Mac loans. Understandably, you might think Fannie Mae and Freddie Mac are two large, popular mortgage lenders.

However, these companies aren’t mortgage lenders in the traditional sense. They don’t lend money directly to homebuyers, but they do play an important role in the U.S. housing market.

What are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises that help stabilize the U.S. housing market, create more liquidity for lenders, and make mortgage financing more widely available.

Although they function similarly today, they were created at different times for different reasons.

Fannie Mae was established in 1938 as part of President Franklin D. Roosevelt’s New Deal. It was originally a government-owned agency designed to help the mortgage market through the Great Depression. In 1954, it became a public-private corporation, and in 1968, it became a publicly traded corporation with no government ownership.

Since Fannie Mae primarily bought mortgages from larger lenders, in 1970, Congress established Freddie Mac to offer support to smaller lenders and strengthen the housing market. In 1989, Freddie Mac became a publicly traded company like Fannie Mae.

Both Fannie Mae and Freddie Mac took on increasing amounts of risky mortgage debt in pursuit of profit. When the housing market collapsed in 2008, their losses were severe enough to threaten the country’s entire mortgage system.

As a result, the Federal Housing Finance Agency (FHFA) placed both Fannie Mae and Freddie Mac under a federal conservatorship, and both have been under government control since.

How Fannie Mae and Freddie Mac loans work

Mortgage loans generate a significant return on investment for lenders. To illustrate: A 30-year, $500,000 mortgage with a 5.27% interest rate would generate $496,198 in interest alone.

But because it takes decades for a lender to recoup their original investment plus interest, mortgage lenders wouldn’t be able to keep up with the ongoing demand for loans without outside help.

When Fannie Mae or Freddie Mac purchases a mortgage from a bank, credit union, or other lender, that lender’s cash reserves are replenished. It can then use that cash to offer mortgages to more homebuyers.

Here’s how the process works step by step:

• You take out a conventional mortgage with a credit union, bank, or other lender
• Once you close on the loan, Fannie Mae or Freddie Mac buys the loan from your lender
• Fannie Mae or Freddie Mac bundles your loan with thousands of others into a mortgage-backed security (MBS)
• They then sell the MBS to global investors

Investors buy bonds backed by that pool of mortgages. As you and other homeowners make monthly payments, investors receive a share of the principal and interest. And because Fannie Mae and Freddie Mac guarantee those payments for a fee, investors get paid even if some borrowers default.

How do conforming loans work?

When Fannie Mae and Freddie Mac buy mortgages, they need to be able to assure investors that they aren’t putting money into high-risk securities. The FHFA sets maximum loan amounts each year, and Fannie Mae and Freddie Mac set the underwriting standards a loan must meet to be eligible for purchase.

These are the requirements for 2026:

• Loan amounts can’t be more than $832,750 in most areas
• Loan amounts can’t be more than $1,249,125 in high-cost areas
• Borrowers must meet a minimum credit score threshold, usually 620
• Borrowers generally must have a debt-to-income ratio of 36% or less
• New home purchases must have a down payment of at least 3%
• Refinances generally require at least 5% equity in the home, meaning a maximum loan-to-value ratio of 95%
• If a borrower’s down payment is less than 20%, they must purchase private mortgage insurance
• The loan-to-value ratio can’t be more than 97%

Loans that meet these guidelines are called conforming loans. While some lenders do offer mortgages that don't meet these requirements, they have a real incentive to offer conforming loans. Selling a loan to Fannie Mae or Freddie Mac takes the debt off the lender’s books, which frees up money so they can offer more loans.

Alternatives to conforming loans

If your credit score isn’t where you want it to be or you think you won’t be able to afford a down payment on a conforming loan, you might worry that buying a home is out of reach.

Fortunately, Fannie Mae and Freddie Mac loans aren’t your only option. These three types of government-backed loans have made homebuying more accessible for countless people:

• U.S. Department of Agriculture (USDA) loans finance rural and suburban homebuyers with down payments as low as 0%
• Federal Housing Administration (FHA) loans require down payments as low as 3.5% and have flexible credit and income requirements
• Veterans Affairs (VA) loans finance military personnel and veterans with as little as 0% down and no private mortgage insurance, though most borrowers pay a one-time funding fee

These aren’t the only alternatives available. Some lenders offer jumbo loans (loans that exceed conforming loan maximums) for homebuyers looking to purchase more expensive homes. Many also offer non-qualified mortgage loans, which don't follow the same rules as conforming loans, allowing for alternative proof of income.

Learn more >> How to buy a house with low income

How to build your credit before applying

You generally need a credit score of at least 620 to qualify for a conforming loan. However, taking the time to build your credit before you apply can pay off.

People with FICO scores in the good (670 to 739) or very good (740 and above) ranges typically qualify for lower rates. The higher your score, the better rate you’re likely to be offered.

If you’re not sure how to build your credit score, these three key steps may help.

Check your credit report

If you haven’t checked your credit in a while, start by getting a free copy of your report. All three credit bureaus allow you to pull a free report once a week at AnnualCreditReport.com.

Look closely for any errors or accounts you don’t recognize. If you see something incorrect, dispute it with the credit bureau. In most cases, you can file a dispute online in a few minutes.

Lower credit utilization

If you have credit cards or other revolving lines of credit, credit experts generally recommend keeping your credit utilization below 30%. Less than 10% is even better.

This can be difficult if you have significant balances, but even paying a little more than the minimum payment each month makes a difference. If you can qualify for a debt consolidation loan with a lower interest rate, it may help you pay off the debt faster and save you money in the process.

If your credit is thin or limited, most of your options come with high interest rates — you end up paying for the privilege of building a score.

Kikoff works differently, reporting your on-time payments to the three major credit bureaus. You can also report the rent and bills you're already paying, so payments you make anyway start counting toward your score. Since payment history is the biggest factor in your FICO score, that adds up faster than most people expect.

Ready to start building your credit?

If you’re new to the credit world, we’ve got you covered. Kikoff reports your on-time payments to the major credit bureaus, so you can start building credit before you ever need it — for a home mortgage, a car loan, or a lower insurance rate down the road.

anies aren’t mortgage lenders in the traditional sense. They don’t lend money directly to homebuyers, but they play an important role in the U.S. housing market.

So what are Fannie Mae and Freddie Mac loans, and how do they work?

What are Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises that help stabilize the U.S. housing market, create more liquidity for lenders, and keep home prices relatively affordable.

Although they have very similar functions now, they were created at different times for different reasons.

Fannie Mae was established in 1938 as part of President Franklin D. Roosevelt’s New Deal. It was originally a government-owned agency designed to help the mortgage market through the Great Depression. In 1954, it became a public-private corporation, and in 1968, it became a publicly traded corporation with no government ownership.

Since Fannie Mae primarily bought mortgages from larger lenders, in 1970, Congress established Freddie Mac to offer support to smaller lenders and strengthen the housing market. In 1989, Freddie Mac became a publicly traded company like Fannie Mae.

Unfortunately, once Fannie Mae and Freddie Mac were free of government oversight, they started making increasingly risky investments to pursue profit. That ultimately led to the subprime mortgage crisis and the housing market crash of 2008.

As a result, the Federal Housing Finance Agency (FHFA) placed both Fannie Mae and Freddie Mac under a federal conservatorship, and both have been under government control ever since.

How Fannie Mae and Freddie Mac loans work

Mortgage loans generate a significant return on investment for lenders. A 30-year, $500,000 mortgage with a 5.27% interest rate generates $496,198 in interest alone.

But because it takes decades for a lender to recoup their original investment plus interest, mortgage lenders wouldn’t be able to keep up with the ongoing demand for loans without outside help.

When Fannie Mae or Freddie Mac purchases a mortgage from a bank, credit union, or other lender, that lender’s cash reserves are replenished. They can then use that cash to offer mortgages to more homebuyers.

Here’s how the process works step by step:

• You take out a conventional mortgage with a credit union, bank, or other lender
• Once you close on the loan, Fannie Mae or Freddie Mac buys the loan from your lender
• Fannie Mae or Freddie Mac bundles your loan with thousands of others into a mortgage-backed security (MBS)
• They then sell the MBS to global investors

Investors purchase shares of a mortgage-backed security. When you and other homeowners make your monthly mortgage payments, each investor receives a proportionate amount of the principal and interest paid.

How do conforming loans work?

When Fannie Mae and Freddie Mac buy mortgages, they need to be able to assure investors that they aren’t putting money into high-risk securities. The FHFA sets stringent requirements for the loans that Fannie Mae and Freddie Mac can purchase. These are the requirements for 2026:

• In most areas, loan amounts may not be more than $832,750
• Loan amounts can’t be more than $1,249,125
• Borrowers must meet a minimum credit score threshold (usually 620)
• Borrowers generally must have a debt-to-income ratio of 36% or less
• New home purchases must have a down payment of at least 3%
• Refinances must have a down payment of at least 5%
• If a borrower’s down payment is less than 20%, they must purchase private mortgage insurance(PMI)
• The loan-to-value ratio can’t be more than 97%

Loans that meet these guidelines are called “conforming loans.” While some lenders do offer mortgages that don't meet these requirements, they have a very real incentive to offer conforming loans. Selling a loan to Fannie Mae or Freddie Mac takes the debt off the lender’s books, which frees up money so they can offer more loans.

Alternatives to conforming loans

If your credit score isn’t where you want it to be or you think you won’t be able to afford a down payment on a conforming loan, you might worry that buying a home is out of reach.

Fortunately, Fannie Mae and Freddie Mac loans aren’t your only option. These three types of government-backed loans have made homebuying more accessible for countless people:

• U.S. Department of Agriculture (USDA) Loans: Finance rural and suburban homebuyers with down payments as low as 0%
• Federal Housing Administration (FHA) Loans: Require down payments as low as 3.5% and have flexible credit and income requirements
• Veterans Affairs (VA) Loans: Finance military personnel and veterans with as little as 0% down and no private mortgage insurance

These aren’t the only alternatives available. Some lenders offer jumbo loans (loans that exceed conforming loan maximums) for homebuyers looking to purchase more expensive homes. Many also offer non-qualified mortgage loans, which allow for alternative proof of income.

How to improve your credit before applying

You generally need a credit score of at least 620 to qualify for a conforming loan. However, taking the time to improve your credit before you apply can pay off.

People with FICO scores in the “good” (670-739), “very good” (740-799), and “exceptional” (800-850) ranges qualify for better rates. Over the course of your mortgage, a lower interest rate could save you tens of thousands of dollars.

If you’re not sure how to boost your credit score, some specific suggestions may help.

Check your credit report

If you haven’t checked your credit in a while, start by getting a free copy of your report from all three credit bureaus. Look closely for any errors or accounts you don’t recognize. If you see something incorrect, dispute it with the credit bureau. In most cases, you can file a dispute online in a few minutes.

Lower credit utilization

If you have credit cards or other revolving lines of credit, try to keep your utilization below 30%. Less than 10% is even better.

This can be difficult if you have significant balances, but even paying a little more than the minimum payment each month makes a difference. If you can qualify for a debt consolidation loan with a lower interest rate, that may help you pay off the debt much faster and save money in the process.

Try a credit-builder app

If you have poor credit or don’t have much credit history, many of your credit-building options come with high interest rates. Credit builder apps can help you see meaningful improvement without worrying about throwing your money away.

For example, when you join Kikoff, you can access an interest-free credit line. You use that credit line to buy items in our online store, and we report your on-time payments to credit bureaus. Your payment history is the biggest factor used to determine your FICO score, so this seemingly small change could help you more than you realize.

That’s not the only way credit-builder apps can improve your credit. Kikoff’s rent and bill reporting help you build credit with the bills you already pay, and we can even help you dispute incorrect items on your credit report.

Ready to start building your credit?

Making sense of credit can be a challenge. But at Kikoff, we try to make it as simple (and even fun!) as we can. Our members see real results, too. On average, new members who start with a credit score below 600 improve by 86 points in a year.*

Do you want to see what we can do for you? Join for free with no credit check today!