In December of 2020, Fannie Mae and Freddie Mac, the two largest government-controlled mortgage companies, which purchase half of all mortgages in the US, applied an additional 0.5% fee to all of their conventional loan purchases. The fee, intended to reduce Covid-19 and the housing market risks, added approximately $1,400 in costs to an average contract for mortgage loan originators. Not surprisingly, this cost was ultimately passed on to consumers. With the economy now on more solid footing, these fees are being eliminated as of August 1, 2021. If you are looking to refinance your current mortgage with a conventional loan product like Fannie Mae/Freddie Mac, below are some things to consider:
Do You Qualify for Fannie Mae/Freddie Mac Loan?
While technically separate entities, the lending guidelines for both Fannie Mae and Freddie Mac are virtually identical. See Understanding Fannie Mae for more detailed guidance and exceptions on loans, but the general guidelines to qualify/receive a single-family home loan are below:
Loan Limit: $548,250 for Alabama (The loan limit is higher in certain high-cost regions)
Down Payment: 3% (Mortgage Insurance required with less than 20% down payment)
Credit Score: 620
Debt to Income Ratio: 45% or less
Income: Two years of steady employment/income
What if You Do Not Qualify?
Additional loan options like Federal Housing Administration (FHA) loans exist for those who do not qualify for conventional loans. Not surprisingly, the terms for these loans are not as favorable and include smaller loan limits, more significant down payments, and mandatory mortgage insurance, to name a few. See FHA vs. Conventional Loans for more details on the differences. Recommendation: Seek the advice of a mortgage loan officer for all available options before making any refinancing decisions.
Get Multiple Quotes
If looking to refinance your home, be sure to get multiple quotes. While the fee owed to Fannie Mae and Freddie Mac is going away as of August 1, many mortgage loan originators may NOT adjust their fees immediately, allowing them to generate greater profits. Recommendation: Always test the market for the best rates.
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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.