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what is ginnie mae gnma

Ginnie Mae is a corporation owned by the U.S. government that guarantees timely payments on home loans that have been made under various federal housing programs and packaged into mortgage-backed securities. Ginnie Mae helps keep home loans available and affordable for lower- and moderate-income homebuyers by making securities backed by federal home loans attractive to investors.

If you’re considering buying a home and think Ginnie Mae may be a good option for you, consider working with a financial advisor.

Ginnie Mae Basics

Ginnie Mae is a nickname for the Government National Mortgage Association (GNMA). Ginnie Mae was formed in 1968 when Fannie Mae, the Federal National Mortgage Association, was split into two parts.

After the reorganization Fannie Mae, which had been around since 1938 as a government-owned corporation, became a private corporation owned by shareholders. Its job was to buy, package and sell mortgages issued by private lenders, such as commercial banks.

The newly created Ginnie Mae was and remains completely owned by the government. It did the same kind of work as Fannie Mae, but only for government-issued loans.

As a self-financed arm of the government, it doesn’t require any taxpayer funds to operate. Ginnie Mae is funded by fees it charges for the guarantees it makes to investors. For instance, a typical Ginnie Mae fee might be 50 basis points, equal to 0.5% of the security’s value. In exchange for this fee, Ginnie May commits to guarantee that investors will receive payments of interest and principal on time and in full.

How Ginnie Mae Works

what is ginnie mae gnma

Ginnie Mae doesn’t actually lend money to homebuyers. Instead, the loans are made or backed by other federal agencies, such as the Federal Housing Administration and the Department of Veterans Affairs. The loans may be for single-family homes, multi-family residences or manufactured houses.

After the loans are made, Ginnie Mae acquires them and assembles them into pools made up of loans that are similar in key respects. For example, loans in one pool may all be 30-year mortgages charging fixed rates of 4% to borrowers with credit scores of 700 or better.

The pools are turned into securities that are backed by the mortgages. These securitized loans are sold to investors on the secondary mortgage market. Investors who buy the securities, commonly known as Ginnie Maes, are entitled to receive payments of interest and principal made by the original borrowers as part of their monthly payments.

Ginnie Mae guarantees the investors they will receive timely payments of principal and interest. As a result, Ginnie Maes are considered low risk, since Ginnie Mae’s guarantee is backed by the faith and credit of the U.S. government. Also, since the loans are made according to Ginnie Mae’s guidelines, investors know investors are likely to make their payments on time.

Types of Loans Ginnie Mae Securitizes

Ginnie Mae only securitizes loans from a select group of federal agencies that provide mortgages to homebuyers. Here are details about these agencies and the types of homebuyers they assist.

  • Federal Housing Administration. The FHA insures mortgages issued on single-family and multi-family properties. FHA-insured loans represent most of the loans GNMA backs.
  • Department of Veterans Affairs. The VA home loan program, which is available to eligible active and former military service members, guarantees 25% of the mortgage amounts on its loans. These loans require no down payment, attractive interest rates and looser qualifying standards than many other programs.
  • Department of Agriculture. USDA Rural Housing Service loan programs guarantee up to 90% of mortgages. USDA loans require no down payment and have lower fees than other government loan programs. They are only available for properties in qualifying rural areas. However, many homes will meet this qualification. Income restrictions also apply.
  • Office of Public and Indian Housing. This unit of the Department of Housing and Urban Development (HUD) guarantees mortgages to eligible members of Native American tribes through the Section 184 loan program. Borrowers enjoy low down payment requirements as well as low interest rates.

Ginnie Mae vs. Fannie Mae and Freddie Mac

what is ginnie mae gnma

Even if you haven’t heard of Ginnie Mae, you may heard of Fannie Mae and Freddie Mac, as both were frequently in the news during the financial crisis that started in 2008. Fannie Mae and Freddy Mac are known as government-sponsored enterprises or GSEs. Both are privately owned but have been under the control of the Federal Housing Finance Agency since the financial crisis of 2008-2009 due to a federal bailout.

Ginnie Mae, on the other hand, is owned by the government. Also, while the two GSEs set guidelines for lending, greatly impacting the availability of home loans, Ginne Mae does not. Rather, the individual agencies that offer loans through Ginnie Mae set standards and guarantee the loans.

Finally, the two GSEs buy private loans and securitize them to sell to investors. Ginnie Mae does not do this.

Bottom Line

The Government National Mortgage Association, or Ginnie Mae, guarantees principal and interest payments on pools of mortgages assembled from loans made or backed by the U.S. government. Ginnie Mae doesn’t issue loans. It gets its income from fees charged for its guarantees. Ginnie Mae is one of three government-owned or -backed organizations that helps maintain liquidity in the mortgage lending business.

Tips

  • Making the right decision about borrowing to buy a home can have significant impact on your ability to meet long-range financial goals. That’s where a financial advisor can offer valuable insight and guidance. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Before you get a mortgage, make sure your payment will fit into your budget by using SmartAsset’s free mortgage calculator.

Photo credit: ©iStock.com/PeopleImages, ©iStock.com/Dean Mitchell, ©iStock.com/valentinrussanov

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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