Fannie Mae and Freddie Mac: The Good, Bad and Ugly for Owner Builder Loans

With the ongoing struggles of the housing industry, the government finally decided to step in and rescue the flailing mortgage giants, Fannie Mae and Freddie Mac. So, how will this bailout affect your ability to get an owner builder construction loan?

Good owner builder loans are construction-to-permanent loans that let you wrap your permanent mortgage into the financing with the construction phase. Because Fannie Mae and Freddie Mac have become virtually the only source of funding for banks and other home lenders looking to make home loans, this means that the Fannie and Freddie bailout will create some good and bad changes for you, the owner builder.

The official government move was to create a conservatorship, which means that government assigned personnel are taking the place of Fannie and Freddie management. In other words, the government assigned managers are now in charge of these two mortgage industry titans, including the $5 trillion in home loans that they currently back.

As an owner builder, you may be wondering why all the fuss about Fannie and Freddie. How do they even work? Why do they affect so many home loans in the United States?

Here's why: banks loan money to homebuyers. Then, these banks sell the mortgages to Fannie Mae or Freddie Mac. Banks then use the money they get from the sale of those mortgages to make new loans. Fannie and Freddie, meanwhile, bundle those loans, attach a payment guarantee to them, and resell them as bonds.

In fact, the government created Fannie and Freddie for the specific purpose of boosting and supporting the mortgage industry. The two mortgage companies are technically privately owned, though they are government sponsored enterprises (GSE) of the United States.

Both Fannie Mae and Freddie Mac have been struggling greatly in the last year due to the falling home prices and rising foreclosure rates. So, with the government conservatorship in place, what does it mean for owner builder construction loans? Let's start with the good.

The good news for owner builder loans is that qualified borrowers will see better interest rates on their permanent mortgages. As mentioned above, good owner builder loans are designed to be construction-to-permanent loans, meaning the borrower only has one loan closing to cover the construction phase and conversion to the permanent mortgage when the house is done being built.

For owner builder construction financing, a borrower will convert over to the permanent mortgage rate when they are done building the home. With the government bailout of Fannie and Freddie, these highly qualified borrowers could see their 30-year-fixed rates drop substantially. The rate during construction probably won't be affected as much, but the long term, permanent rate is the more important rate anyway.

So, that's the good news. What about the bad news?

The bad news for owner builder loans is that the guidelines will probably get even stricter as Fannie and Freddie struggle to eliminate any mortgages that they would consider risky. Therefore, an owner builder may see tighter requirements for debt-to-income ratios or slightly larger down payments needed.

However, looking at the big picture, it is important to note that owner builder construction loans will still be available. Things could have been much worse. But, with the government bailout of Fannie and Freddie, the overall good news is that owner builder lending will continue.

Guidelines might be a little stricter, but strong borrowers will see better rates on their permanent mortgages. Weaker borrowers, with credit scores below 700, may find it helpful to spend time during their planning phase working on increasing their credit scores. It will help their chances at approval and definitely help their rates. If you find yourself in this category, speak with your owner builder loan officer about some credit repair options.