A GSE home loan is a government-sponsored enterprise home loan. In terms you may relate to – it’s a Freddie Mac or Fannie Mae home loan. These loans are meant to help encourage lenders to lend money to borrowers. It’s an effort to keep stimulating the economy to keep it going.
Fannie Mae and Freddie Mac are the two largest GSE mortgage providers in the United States today.
What do Freddie Mac and Fannie Mae Do?
When you get a mortgage, even a GSE, you won’t get it from Freddie Mac or Fannie Mae. Instead, you will get it from a lender. That lender then sells the loan to one of the two GSEs on the secondary market. This is what keeps a lender’s money flowing, as they are able to write more loans, sell them, and keep the process going.
Conforming Loans – Another Name for GSE
You may hear GSEs more commonly called conforming loans. These are loans that meet the guidelines of Freddie Mac or Fannie Mae. They are often known as the ‘good mortgages’ as they have the lowest closing costs, lowest interest rates, and best terms.
Typically, you need fairly good credit and decent debt ratios to qualify for a GSE. The most common guidelines include:
- 680 credit score or higher
- 28% front-end ratio (housing payment can’t exceed 28% of your gross monthly income)
- 36% back-end ratio (all of your debts can’t exceed 36% of your gross monthly income)
- Stable income and employment
- No recent collections, bankruptcies, or foreclosures
Each lender will have their own requirements that they add to the GSE requirements, but these are the basic guidelines you will have to follow in order to qualify.
Basically, the GSE loan is one that falls under conforming guidelines. When you get a mortgage from a GSE lender, they are not going to keep it on their books. They are going to sell your loan to Fannie Mae or Freddie Mac. This may mean that your loan servicer could change from time to time. It’s important to ask your funding lender who will service your loan so that you can make sure it’s a reputable company that you can do business with, but of course, your loan could get sold multiple times.
GSEs make it possible for conforming lenders to write loans for people with flexible guidelines. Even though they have higher credit score requirements and require lower debt ratios than government-backed loans, GSEs often provide the best mortgages available on the market today.