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You’ll hear a lot of jargon when applying for a mortgage, including Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie and Freddie are more well-known than Ginnie Mae, but if you plan on investing in mortgage-backed securities, you’ll want to know who they are and what they do.
History of Ginnie Mae
Ginnie Mae started as a branch of the Federal National Mortgage Association (FNMA) or Fannie Mae. In 1968, it was decided that Fannie Mae was too overwhelmed, and Ginnie Mae was born. Fannie Mae focused on conventional loans, and Ginnie Mae focused on government-backed loans.
However, the process started with the Great Depression when millions of people defaulted on their loans. The large number of foreclosures caused home values to plummet, which caused Congress to create The National Housing Act of 1934, which is how the FHA was born.
At this point, Fannie Mae became a publicly traded company that backed conventional loans, and Ginnie Mae became a government-sponsored enterprise and guaranteed FHA and other government loans.
What is Ginnie Mae?
Ginnie Mae doesn’t originate, fund, or manage loans. Instead, they guarantee the mortgage-backed securities for government-backed loans, including FHA, VA, and USDA loans.
Private lenders issue the loans to borrowers and pool them into securities sold on the secondary market—the secondary marketissues mortgage-backed securities which individual investors buy. Ginnie Mae’s role is to guarantee the principal and interest payments even if a borrower defaults.
What Does Ginnie Mae Do?
Ginnie Mae is like the ‘backup’ for investors. Those who invest in mortgage-backed securities don’t have to worry about borrowers missing payments. Ginnie Mae makes up the payments for them, ensuring investors always earn the money they were promised.
Ginnie Mae’s purpose is to help expand the offering of government-backed mortgages to underserved families. With more market liquidity and guarantees, lenders can more freely issue FHA, VA, and USDA loans.
These loans have more flexible guidelines than conventional loans, making it easier for people with less than perfect credit or other less than perfect qualifying factors to secure a loan.
Does Ginnie Mae Offer Bonds?
Ginnie Mae packages its mortgages(the mortgages it buys from private lenders) into bonds that they sell on the secondary market. The bonds are typically grouped by risk; for example, loans with a specific credit score are grouped together, or loans with specific down payments, such as 3.5%, are grouped together.
The nice thing about Ginnie Mae bonds is the guarantee they offer. Many investors focus on mortgage-backed securities to begin with, because most people pay their mortgage before any other bills if things get tough. But the Ginnie Mae backing makes these investments even more attractive since there’s a very low risk of a loss.
What Are the Differences Between Ginnie Mae and Fannie Mae?
At first glance, Ginnie Mae and Fannie Mae are similar. They both offer mortgage-backed securities sold as bonds on the secondary market.
Both entities help keep the mortgage industry liquid, so lenders have more money to continue lending to more borrowers. However, the largest difference is in the types of mortgages they guarantee. Ginnie Mae, as we discussed, backs government-backed mortgages, and Fannie Maebacks conventional or non-government backed loans.
Conventional loans have tougher underwriting requirements, including higher credit scores and lower debt to income ratio requirements. They also sometimes have lower interest rates than government loans, but both have the same risk of default and are backed by their agency.
What Mortgage Loans Are Secured by Ginnie Mae?
Ginnie Mae backs quite a few loans, versus Fannie Mae only backing conventional loans. Here’s what Ginnie Mae backs.
FHA Loans
FHA loans are great for borrowers that don’t qualify for conventional financing. You need 3.5% down and a 580-credit score which is much lower than the 620-credit score conventional loans require. FHA loans allow more borrowers an opportunity to buy a home. You must prove the home will be your primary residence to qualify.
RHS Loans
RHS or USDA loans are loans for low to moderate-income families that don’t qualify for any other loan program and don’t own a home. It’s also for borrowers who will buy a home in a USDA-designated rural area, which means areas outside urban boundaries or city limits.
Borrowers need a 640-credit score to qualify to prove they’ll live in the home as their primary residence.
VA Loans
Veterans of the military that don’t have a dishonorable discharge can get VA loan financing. This financing requires no down payment and doesn’t have a minimum credit score requirement. Most lenders require a 620-credit score, though. The VA focuses on a borrower’s disposable income to ensure you have enough money to cover your living expenses and aren’t making yourself house poor.
Mortgage Financing for Native Americans
The HUD Native American Program offers the Section 184 loan program that requires a minimum 2.25% down payment if you borrow over $50,000 or 1.25% down if you borrow less. Mortgage financing has low-interest rates but can be harder to find since not all lenders offer it.
Is Ginnie Mae Considered a Government-Sponsored Enterprise?
Ginnie Mae is the only agency that isn’t a government-sponsored enterprise (GSE). It’s a part of the U.S. government, unlike Fannie Mae or Freddie Mac which are GSEs. Ginnie Mae doesn’t insure lenders against default like the FHA or VA does, for example. They only back up investors that buy the mortgage-backed securities they created from approved lenders.
Bottom Line: What Is Ginnie Mae?
Ginnie Mae is a pivotal player in the mortgage industry. Understanding their role can help you make good mortgage decisions and get the right loan.
