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Ginnie Mae (GNMA): How The Government National Mortgage Association Works, And Its Effect On The Housing Market

Kevin Graham7-minute read

October 22, 2021

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If you don’t work in the housing industry, the ins and outs of the housing market might be foreign to you. Still, if you’re looking to buy a home or refinance your mortgage, it can be helpful to understand some of the big players. If you’re looking to get a loan directly backed by the federal government, Ginnie Mae is an agency you should know.

In this article, we’ll go over what Ginnie Mae is, how it works and the role it plays in the markets in backing government loans for homes. Finally, we’ll compare Ginnie Mae to Freddie Mac and Fannie Mae, the backers of conventional loans.

What Is Ginnie Mae?

Ginnie Mae, or the Government National Mortgage Association (GNMA), is a government agency that guarantees timely payments on mortgage-backed securities (MBS). In doing this, Ginnie Mae works with other government agencies to make affordable housing widely available through mortgage loans.

Formed as a result of a split with Fannie Mae, GNMA is overseen by the U.S. Department of Housing and Urban Development (HUD). Its role is to provide liquidity in the market for home loans that are directly guaranteed by the U.S. government.

Specifically, Ginnie Mae guarantees mortgages that are designed to open up homeownership to a wider array of people. You may be able to qualify for a government-backed mortgage even if you’ve got a few blemishes on your credit, or if you have a shorter history.

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What Does Ginnie Mae Do?

Ginnie Mae is one of three major bond issuers that allows for the funding for most consumers in the real estate market. By guaranteeing principal and interest payments on mortgages that are part of its mortgage-backed security portfolio (more on that later), it provides investor protection against a borrower not being able to make their payment and defaulting on the terms of the loan.

At the same time, the liquidity being provided for nonbank and other mortgage lenders helps keep funding for government-backed loans more affordable than if banks and other mortgage originators were forced to hold the loans for significant periods of time.

While many may believe there are Ginnie Mae loans, GNMA simply backs mortgages, and doesn’t offer it themselves. Rather, mortgage originators like Rocket Mortgage® collect applications, underwrite and close loans. Then, the mortgage is sold to GNMA in order to free up capital for the lender to make additional loans. The system supports the smooth functioning of the housing market.

What Are Ginnie Mae Bonds?

The primary way that Ginnie Mae provides the liquidity necessary to support the free flow of capital in the housing market is by packaging the mortgages it buys into bonds, also known simply as GNMAs. Here’s a quick overview of the process:

A mortgage bond or MBS is made up of many loans that have been grouped together based on similar characteristics. For example, a possible GNMA bond might consist of 1,000 FHA loans with median FICO® Scores of 620 or better and down payments or equity amounts of at least 3.5%. Ginnie Mae puts this bond together and makes it available to investors in the bond market.

Are Ginnie Mae Bonds Safe To Invest In?

Bond payments backed by underlying mortgage payments are historically considered safe to invest in because many will prioritize their home payments over other expenses. However, these bonds come with the extra assurance that GNMA will make the investor whole in the event the borrower defaults. This can be a huge attraction.

Of course, any investor should be concerned with the rate of return they’re going to get on their money. Like any bonds, GNMAs are impacted by rising and falling interest rates. When interest rates are rising, it’s because conditions in the market are such that it requires a higher yield to attract a bond investor.

It’s also important to note that in light of COVID-19, the Federal Reserve has stepped in and purchased tens of billions of dollars’ worth of MBS, including GNMAs. Given the higher demand, bond yields and rates have been lower than they otherwise would be. This had the effect of creating a favorable interest rate environment for consumers. At the same time, investor returns are lower. However, as the economy recovers from the unforeseen circumstances the pandemic has created, interest rates have steadily begun to rise again.

Mortgage Loans Secured By Ginnie Mae

Ginnie Mae secures a variety of mortgage loans that have the direct backing of the federal government. Let’s run through them.

FHA Loans

The majority of loans backed by Ginnie Mae are those underwritten to the requirements of the Federal Housing Administration (FHA). FHA loans are aimed at borrowers with less-than-perfect credit or shorter histories. Although you can get an FHA loan with a 10% down payment if your median FICO® Score is 500 or better, most lenders, including Rocket Mortgage®, require a median score of 580 with a down payment of 3.5% or more.

It’s also important to note that you may qualify for increased flexibility around your debt-to-income ratio (DTI) if you have a score of 620 or better. Higher credit scores can also mean lower rates if everything else is held equal.

One thing clients should know about FHA loans is that if you make the minimum down payment, there’s monthly mortgage insurance for the life of the loan to go along with an upfront mortgage insurance premium.

VA Loans

GNMA also secures VA loans made through the home loan program from the Department of Veterans Affairs. This program is intended for eligible active-duty servicemembers, reservists, National Guard personnel, veterans and surviving spouses receiving dependency and indemnity compensation (DIC).

In addition to having no required down payment, the other key selling points of this loan option include highly competitive rates and the ability to qualify with a slightly higher DTI than you could on most other loans. Additionally, you can take out 100% of your equity and convert it to cash if you have a high enough FICO® Score.

Although the VA doesn’t specify a minimum median score necessary to qualify for a standard VA loan, most lenders require a median score of at least 620. Instead of mortgage insurance, there’s a VA funding fee that’s a percentage of the loan amount which depends on factors like your down payment, service status and whether you’ve used a VA loan in the past.

RHS Loans

Ginnie Mae also backs loans made by the U.S. Development of Agriculture (USDA) through its Rural Housing Service (RHS) program. Intended to provide an affordable mortgage for those living in rural areas, USDA loans have several advantages.

The main benefits of the program are that there’s no required down payment. Additionally, guarantee, or funding, fees on USDA loans are cheaper than the monthly and upfront mortgage insurance payments for FHA loans.

In order to qualify for this loan option, you have to live in a qualifying rural area. Additionally, you and everyone in your household can’t make more than 115% of the area median income.

At this time, Rocket Mortgage doesn’t offer USDA loans.

Mortgages For Native Americans

HUD’s office of Native American Programs offers low down payment options on low-interest home loans through its Section 184 Loan Program. The minimum down payment is 2.25% if your loan is over $50,000 and 1.25% if under $50,000. The interest rates are also based on the market rather than your credit score.

These loans are manually underwritten, so there may be some flexibility around credit depending on your situation. Additionally, the loan features a 1% guarantee fee that can be paid upfront or built into the loan rather than a mortgage insurance requirement.

At this time, Rocket Mortgage doesn’t originate Section 184 mortgages.

How Does Ginnie Mae Differ From Government-Sponsored Enterprises?

GNMA bonds are comprised of mortgages originated by the federal government. In comparison, conventional loans are backed by a couple of big government-sponsored enterprises, also known as GSEs. Although these are private entities and not directly agencies of the federal government, the loans have an implied government guarantee because the GSEs entered government conservatorship after the 2008 housing crisis.

Let’s do some comparison of the practices of these agencies.

Ginnie Mae Vs. Fannie Mae And Freddie Mac

Ginnie Mae does have some similarities to Fannie Mae and Freddie Mac. They all buy mortgages to package into an MBS, which is sold on the bond market. This provides liquidity in the mortgage market and helps keep housing affordable. Both Fannie Mae and Freddie Mac were also started with government charters, so they came out of similar places with the same mission.

A key difference between Fannie Mae versus Freddie Mac and Ginnie Mae lie in the types of mortgages they buy. Fannie Mae and Freddie Mac back mortgages known as  conventional loans. These come with minimum credit scores of at least 620. Because credit scores are higher and borrowers are often better qualified, interest rates on these loans are usually lower than many government loans.

From the perspective of someone looking to get a mortgage, conventional mortgages offer down payments as low as 3%, although you can avoid mortgage insurance entirely with a 20% down payment. The even better news is that you can request mortgage insurance come off once you reach 20% equity.

There have been stops and starts in efforts for Freddie Mac and Fannie Mae to leave their conservatorship with the Federal Housing Finance Agency (FHFA). For now, the status quo remains.

The Bottom Line: Ginnie Mae Provides Support For Government-Backed Mortgages

Ginnie Mae buys government-backed mortgages to provide fresh capital for the mortgage industry to make more loans and support the mission of affordable housing. After buying the mortgages, loans with similar characteristics are packaged into MBSs and sold on the bond market to investors. GNMA promises to back the bonds even in the event of loan default.

Ginnie Mae guarantees FHA loans, VA loans, USDA loans and the Section 184 loan program to help facilitate Native American homeownership. Fannie Mae and Freddie Mac are GSEs which have government backing, but they’re not government entities themselves. They buy conventional loans.

Now that you have the lowdown, maybe you’re ready to get started. Apply online with Rocket Mortgage.

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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.