Fannie Mae Underwriting Guidelines

Kristie Lorette McCauley
Loan Documents

Fannie Mae is a government agency originally established to make homeownership affordable for everyone. As an agency that works with lenders to provide mortgages to homebuyers, Fannie Mae has a strict set of guidelines that each mortgage, and therefore each borrower, must adhere to.

Property Types

The type of property being financed is one of the most important factors when it comes to meeting Fannie Mae guidelines. Fannie Mae finances single-family homes and residential property that has up to four units. This includes apartments, townhomes, condominiums and co-ops. The properties have to be permanently fixed to a structure, so manufactured homes can be financed as long as the home is fixed to a concrete or other permanent foundation.

Property Use

Fannie Mae guidelines differ as to whether the borrower is financing a primary residence, vacation home or investment property. Financing is available for all three types of properties, but the specifics of the guidelines change. For example, Fannie Mae guarantees a higher mortgage amount on a property that is a primary residence than an investment property, because a primary residence is less risky than an investment property.

Financing Purpose

Finally, Fannie Mae also allows borrowers to refinance existing properties. Borrowers have the option of doing a straight refinance, which is when they refinance the new mortgage for the same amount as the existing mortgage balance. Borrowers can also do a limited cash-out refinance, which is when the borrower refinances the existing mortgage balance, in addition to taking equity out of the property in the form of cash.

Maximum Loan Amounts

Fannie Mae guidelines specifically state the maximum loan amount allowable. While buyers can choose a home with a purchase price that exceeds the maximum loan amount, the borrower can only finance up to the maximum loan amount. The maximum loan amount can vary according to the state and the county where the property is financed.

As of October 2012, the maximum loan amount for a single-family home is $417,000. In areas where property values are higher than other parts of the country, such as California, Fannie Mae sets higher loan limitations. For example, in Los Angeles, the maximum loan amount for a single-family home is $625,000.

Property Type and Use

The maximum loan amount can also vary according to the type of property and its use. For example, a duplex, where the borrower plans to occupy one unit as a primary residence and rent out the other unit, has higher loan limits than a standard primary residence or a standard investment property.

As of October 2012, the maximum loan amount for a two-unit property is $533,850. In areas where property values are higher than other parts of the country, such as California, Fannie Mae sets higher loan limitations. For example, in Los Angeles, the maximum loan amount for a duplex is $934,200.

Loan to Value

Another requirement of the guidelines is that the home being financed must be appraised. This is true whether the home is a purchase or a refinance.

Purchase Price Percentage

Fannie Mae does not allow loans that match 100 percent of the purchase price or the market value of a home. Instead, Fannie Mae guarantees a mortgage amount as a percentage of the purchase price or the market value of the home, whichever of the figures is lower. The percentage of the purchase price or market value of the home that the borrower can finance is the loan-to-value. The loan-to-value varies according to the type of property, the type of mortgage (fixed or adjustable rate) and whether the financing is for a purchase of a home or a refinance.

For example, if a borrower is buying a primary residence, the loan-to-value is 95 percent of the purchase price if the mortgage is fixed, and 90 percent if the mortgage is adjustable. This means that Fannie Mae allows financing for up to 95 percent of the purchase price. If the purchase price of the home is $100,000, Fannie Mae guarantees a mortgage amount of $95,000 for a fixed rate mortgage or $90,000 for an adjustable rate mortgage.

Credit Score

Fannie Mae also requires that borrowers meet specific credit requirements. One of the primary credit requirements is the borrower's credit score. A minimum credit score varies according to the type of mortgage the borrower is using (fixed rate or adjustable rate) and the loan to value. Minimum credit score requirements range from 620 to 680 with minimum loan to values of 75 percent.

Debt and Income Requirements

The borrower also has to fall under specific guidelines when it comes to the amount of outstanding debt and the amount of income they earn, known as the debt-to-income ratio. The debt-to-income ratio requirements vary according to the borrower's credit score and the loan to value.

It is all about risk, so the higher the borrower's credit score is and the lower the loan to value is, the higher the debt to income ratio can be for the borrower. Generally, debt to income ratios have to run between 36 and 45 percent, which means the borrower's total amount of debt cannot exceed 36 to 45 percent of the borrower's income.

Affordable Homeownership

Meeting Fannie Mae guidelines can help individuals realize the dream of homeownership, but homeownership also helps to build communities up economically--making it a win-win situation for everyone involved.

Fannie Mae Underwriting Guidelines