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What is Ginnie Mae?

What is Ginnie Mae?

It helps get first-time buyers and those with less-than-perfect credit a shot at homeownership

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Updated 01/27/2023

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Ginnie Mae is a nickname for the Government National Mortgage Association (GNMA), a government-owned corporation that guarantees the principal and interest payments on mortgages held within many mortgage-backed securities (MBSs).

Essentially, people who invest in certain MBSs can be sure they’ll receive a portion of the payments made on those loans because of Ginnie Mae. Ginnie Mae MBSs are the only ones backed by the full faith and credit guaranty of the U.S. government, which makes them safer for investors.

Ginnie Mae guarantees payments on mortgage-backed securities that are secured by loans made possible through government programs (like FHA loans or VA loans). Mortgage-backed securities made up of conventional mortgages, like those offered by banks, credit unions and other mortgage companies without any government support, are not backed by the Ginnie Mae guaranty.

Key insights

Ginnie Mae guarantees payments on mortgage-backed securities that are composed of certain government-backed loans.
This makes those mortgage-backed securities more appealing to investors, which makes government-backed loans more attractive to lenders.
The end result is that more borrowers are able to qualify for home loans because lenders and investors feel safer giving out money.

What does Ginnie Mae do?

Ginnie Mae doesn’t originate or purchase mortgages — instead, it guarantees that investors in certain mortgage-backed securities will receive a portion of the payments borrowers make on their government-backed mortgages.

This guarantee makes MBSs consisting of these federally insured loans more attractive to investors. Without this guarantee, investors would be at more risk when buying securities backed by loans to people like first-time homebuyers and those with low credit scores.

As Kevin Leibowitz, president and owner of Grayton Mortgage, puts it: “Ginnie Mae is NOT a lender. They provide insurance on mortgages (FHA, VA, USDA, PIH). These loans are guaranteed by Ginnie and are pooled into mortgage-backed securities (MBSs). Those securities are sold by the issuers (banks/nonbanks) in the secondary market. The buyers of these securities know that they are guaranteed by the full faith and credit of the U.S. government.”

How is Ginnie Mae different from Fannie Mae?

Ginnie Mae is a government-owned corporation that guarantees government-backed loans in MBSs. It does not own mortgages or MBSs, nor does it set underwriting or credit requirements.

On the other hand, Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase conventional mortgage loans from lenders in order to package and resell those loans as MBSs to investors. These GSEs establish specific underwriting requirements for their approved lenders.

Conventional mortgages typically carry higher underwriting requirements than government-insured loans. For example, the minimum credit score for a conventional loan is generally 620, but you can qualify for an FHA loan with a score as low as 500.

How is a Ginnie Mae loan different from an FHA loan?

This question comes up occasionally, but it’s actually based on a misunderstanding of what Ginnie Mae does. The FHA sets its own mortgage requirements and offers federally insured loans to first-time homebuyers and low- to moderate-income borrowers. Ginnie Mae, on the other hand, does not actually fund or own loans, and a majority of the Ginnie Mae-guaranteed mortgages in MBSs are, in fact, FHA loans.

What types of loans does Ginnie Mae secure?

Ginnie Mae doesn’t technically secure loans. Ginnie Mae guarantees mortgage-backed securities that are secured by various types of government-backed loans, including FHA loans, VA loans, USDA loans and Section 184 loans.

Ginnie Mae guarantees FHA, VA, USDA and Section 184 loans in MBSs.

FHA loans are generally insured by the federal government through the Federal Housing Administration. FHA-backed loans, such as the 203(b) Basic Home Mortgage Loan, are a popular choice among first-time homebuyers because of the low down payment requirement (often only 3.5%).

According to Leibowitz, FHA loans are best for the following:

Those with low credit
Borrowers who need a low down payment
Those who’ve experienced bankruptcy or foreclosure

VA loans are often guaranteed by the Department of Veterans Affairs and are available to veterans, service members and their surviving spouses. VA-backed purchase loans have no down payment requirements.

USDA-backed loans are insured by the U.S. Department of Agriculture. These loans often help low-income borrowers in rural areas qualify for mortgages.

Section 184 loans are guaranteed home loans made to Native American borrowers. These loans are offered by the U.S. Department of Housing and Urban Development’s Office of Native American Programs.

FAQ

Who qualifies for a Ginnie Mae loan?

The term “Ginnie Mae loan” is a misnomer. Ginnie Mae doesn’t buy, sell or originate loans. The only loans that can potentially be considered “Ginnie Mae loans” are those loans made possible through other government agencies that are used to secure the mortgage-backed securities that Ginnie Mae guarantees.

Most of these government-backed mortgages target low- or moderate-income borrowers. The credit score requirements for conventional loans are often stricter than those for government-backed mortgages, so you may be more likely to qualify with a credit score of less than 620. Other eligibility terms depend on the type of loan you’re applying for.

Government-backed loans aren’t the only option for many borrowers, though. Leibowitz adds, “The principal item that causes confusion to borrowers is that many believe that FHA is the best/only low down payment option (3.5% down). Fannie and Freddie have a 3% option as well. If a borrower has a higher credit score (700+), then most of the time a Fannie or Freddie mortgage is better … with a sufficiently high credit score and a clean history (no bankruptcies, foreclosures, short sales), Fannie and Freddie loans are less expensive.”

Is Ginnie Mae a primary lender?

Ginnie Mae isn’t a lender at all. It’s a government-owned corporation that offers guarantees on mortgage-backed securities (MBSs). Ginnie Mae doesn’t buy or sell mortgages, nor does it issue MBSs.

Is Ginnie Mae part of HUD?

Ginnie Mae is within the Department of Housing and Urban Development (HUD).

How does your credit score affect getting a mortgage loan?

Your credit score has a significant impact on the mortgages you’re eligible for (you generally need a credit score of at least 620 to qualify for most conventional loans). It also affects the interest rate you’re offered — broadly speaking, the higher your credit score, the lower your interest rate.

In order to make home loans available to a wider range of borrowers, including those with below-average credit, the federal government has programs and institutions (like Ginnie Mae) that make homeownership more accessible for riskier borrowers. For example, government-backed mortgages, like some FHA, VA and USDA loans, generally have lower income and credit requirements than conventional loans.

Bottom line

Ginnie Mae is a government-owned corporation that guarantees principal and interest payments on mortgage-backed securities secured by federally insured mortgages. This helps keep capital flowing within the housing market — lenders can sell mortgages on the secondary market to investors, which frees up cash to lend to more borrowers.

Ginnie Mae’s guarantee encourages people to invest in these securities, and as a result, lenders are more likely to offer loans to borrowers with less appealing incomes and credit scores.

Article sources

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