Buying a home and looking for a mortgage? You might have heard of the Federal Home Loan Mortgage Corporation, better known as Freddie Mac. But what is Freddie Mac and what is a Freddie Mac mortgage?
Freddie Mac is one of two government-sponsored entities, along with Fannie Mae. According to the Federal Housing Finance Agency, Congress created both Freddie Mac and Fannie Mae to provide liquidity, stability and affordability in the U.S. mortgage market.
Freddie and Fannie do this by buying mortgages from lenders and either holding these loans in their own portfolios or packaging them into mortgage-backed securities that they can sell to investors.
Lenders use the cash they raise by selling their mortgages to Freddie Mac and Fannie Mae to loan more money to home buyers. Thanks to Freddie Mac and Fannie Mae, then, individuals and investors who want to purchase single-family homes and multifamily properties have access to the mortgage dollars that they need to finance these purchases.
When applying for a mortgage, you can choose from many loan types, anything from a fixed-rate mortgage in which your interest rate will never change to an adjustable-rate mortgage in which your interest rate can rise or fall during the life of your loan. But all these mortgages fall into two main categories: conforming and non-conforming loans.
Conforming loans are those that meet certain limits set by the Federal Housing Finance Agency. Freddie Mac – and Fannie Mae – can only purchase conforming loans from lenders. It is not allowed to buy non-conforming loans.
Each year, the Federal Housing Finance Agency sets a maximum conforming loan limit. Any mortgage loans for higher than that amount are categorized as non-conforming loans. For 2024, the conforming loan limit in most parts of the country for single family homes is $766,550, an increase of $40,350 from 2023. In higher-cost areas of the country such as New York, California and Hawaii, the conforming loan limit can be more than $1.149 million.
Any loans for higher than an area's conforming loan limit will be qualified as a non-conforming loan and not eligible for purchase by Freddie Mac.
Freddie Mac has other requirements for what it considers a conforming loan. For example, when using a mortgage to finance the purchase of a one-unit primary residence, borrowers taking out most mortgage loans must come up with a down payment of at least 5%. Borrowers who take out a Freddie Mac HomeOne mortgage, though – available to first-time home buyers – can provide a down payment of just 3% of a home’s purchase price and still have their mortgage qualify as a conforming loan.
Why does it matter if a loan is conforming or non-conforming? Taking out a conforming loan can save you money. Conforming loans generally come with lower interest rates because lenders are taking on less risk. Because Freddie Mac can purchase such loans, lenders might not have them on their books for 15 or 30 years. If lenders feel that they are taking on less risk, they won’t need to charge you a higher interest rate. That’s good for you: Higher interest rates result in higher monthly payments. Lower rates mean lower monthly payments. Freddie Mac and Fannie Mae, then, help make it possible for borrowers to qualify for mortgage loans at lower interest rates.
It's important to remember, though, that Freddie Mac does not originate its own mortgages. You’ll have to apply for a mortgage with a bank, credit union or lender. If your mortgage qualifies as a conforming loan, Freddie Mac might buy it. But you can’t approach Freddie Mac directly and apply for a home loan.