The guarantee covers principal and interest. The way it works is that Fannie or Freddie (the Home Loan Banks operate differently) agree to buy the mortgage for the unpaid principle balance, plus accrued interest, when the loan is 120 days delinquent. They put the guarantee on securities backed by loans that met their underwriting standards, so it’s possible for a loan to be in a guaranteed pool without a down payment, but there aren’t many of them. Their’s no income limits. They do stated income. If the case of fraud, they have the right to demand that the seller of the loan buy it back from them. That is, of course, if the seller is still in business. Their is a lot of detail on their loan characteristics, such as % stated income, average LTVs and credit scores, etc., in the quarterly filings they did last month, available on their websites.
