Mortgage Daily

Published On: December 15, 2022

A HomeReady Loan, and What Is It?

Several lending programs may help homebuyers with modest incomes and little money down. The Fannie Mae HomeReady mortgage is one such scheme.

For a HomeReady loan, you might put down as little as 3%. That is $6,000 down on a $200,000 property, which is even less than the 3.5% required by the FHA.

To help with your upfront fees, you might also use donations, grants, or a down payment loan. Additionally, co-borrowers who live within or outside the home might be listed on your application.

As a result, HomeReady is one of the more straightforward mortgage programs to be approved for.

About the HomeReady Mortgage

In December 2015, the federal mortgage company Fannie Mae introduced the HomeReady initiative. Several significant American lenders now offer it.

Home buyers who earn less than the average for their region can more easily acquire low-down-payment mortgages at the current rates thanks to the HomeReady program.

The minimum down payment for this scheme is merely 3%.

HomeReady has the unique advantage of letting several revenue sources support your application.

You may apply with co-borrowers who reside in the same house as you or who do not (known as non-occupant co-borrowers). You may also include income from a tenant or boarder on your application if it is adequately documented.

These guidelines may make the difference between granting or denying a family’s loan application.

HomeReady can also be used for refinancing by current homeowners.

In rare circumstances, the program enables a loan-to-value (LTV) of up to 97%. Thus, you are not required to wait until you have 20% equity before refinancing into a loan with a reduced interest rate and monthly payment.

Becoming Eligible for a HomeReady Loan

You must meet the program’s income requirements, complete a quick online course on homeownership, and have good credit to qualify for a HomeReady loan.

Although specific requirements may differ depending on the lender, Fannie Mae establishes the baseline standards for all HomeReady loan applications.

HomeReady’s fundamental prerequisites include the following:

  1. You may make up to 80% of the median income in your Census tract. Check the median salary in your region here.
  2. You must consent to finish a 4-6 hour online course about homeownership.
  3. In most cases, a minimum FICO score of 620 is required.
  4. The house must be your principal residence.
  5. A debt-to-income ratio (DTI) of no more than 50% is required. Compared to most other mortgage schemes, this is more liberal.

If you fit these requirements, the HomeReady financing program could be precisely what you need to switch from renting to owning.

Limitations on HomeReady Income

For its HomeReady program, Fannie Mae establishes income restrictions. You cannot earn more than 80% of the median income in your region to be eligible (AMI).

Accordingly, if the typical annual income in your region is $100,000, you must earn $80,000 or less to be eligible for the HomeReady program.

These restrictions are not an issue for most applicants because HomeReady is designed for borrowers with lower incomes.

What if you are concerned that your salary is too low to qualify?

The HomeReady loan might be a massive assistance in such a situation.

Flexible Income Sources for HomeReady

If the applicant’s total income is within the local HomeReady income cap, Fannie Mae will accept an application with one or more co-borrowers.

If a tenant has lived with you for at least a year before purchasing the house, you may include their income in your application.

Even if you have a higher DTI or a poorer credit score, Fannie Mae permits lenders to take non-borrowing family members’ income into account as a “compensating factor,” which may improve your prospects.

Remember that non-borrower income will be excluded from your qualifying income calculation. Additionally, these guidelines differ amongst lenders, and non-borrower income may not often be considered.

Eligible Types of Property

With a HomeReady loan, borrowers have several alternatives for purchasing real estate.

If you like, you can buy a conventional single-family home. However, Fannie Mae also permits the purchase of the following items if you’d prefer something a little different:

  • Condominium apartments
  • Residences in a planned community (PUD)
  • Co-ops
  • Prefabricated houses
  • Apartment buildings with 2, 3, or 4 apartments

Remember that applicants who desire multi-unit housing require a higher credit score—possibly as high as 680.

Whatever kind of property you purchase via HomeReady, it must be your primary residence. This implies that if the building contains 2-4 apartments, you must permanently occupy one.

In other words, buying investment properties or holiday houses is not permitted with the help of this credit scheme. It is designed for home buyers with low and moderate incomes seeking a place to reside.

Mortgage Interest Rates for HomeReady

HomeReady mortgage loan interest rates are the same as those for “conventional” loans. The HomeReady program is not subject to a premium.

The HomeReady loan’s interest rates may be significantly lower than those of other low-down-payment mortgages, like the 3% traditional 97 loans.

However, comparison shopping is advantageous because mortgage rates can vary by as much as 0.50 percentage points (0.50%) between banks. Once you have obtained your initial estimate, continue your search.

Options for Fixed-Rate Mortgages

The HomeReady mortgage program offers borrowers a wide range of fixed-rate mortgage solutions, such as:

  • 10-year fixed-rate mortgage
  • 15-year fixed-rate mortgage
  • 20-year fixed-rate mortgage
  • 30-year fixed-rate mortgage

Compared to USDA loans, which only provide a 30-year mortgage, this variety of possibilities is a significant advantage.

Loans with shorter terms often have interest rates below those of 30-year loans. Borrowers can save tens of thousands of dollars in mortgage interest throughout the loan due to the low rate and short duration.

However, the monthly payments for 10-, 15-, and 20-year loans are often substantially more significant than those for 30-year mortgages. You must repay the exact loan balance in a shorter period.

Because of this, the majority of homebuyers choose 30-year fixed-rate mortgages.

Options for Adjustable-Rate Mortgages

A variety of adjustable-rate mortgage (ARM) packages are available to borrowers who use the HomeReady mortgage program. These consist of the following:

  • 5/1 ARM
  • 7/1 ARM
  • 10/1 ARM

The interest rate is fixed for the first 5, 7, or 10 years of an adjustable-rate loan. Your interest rate and monthly payment may then increase annually.

Due to this, ARMs are significantly riskier than fixed-rate loans.

Some prestigious lenders have chosen to forego HomeReady ARMs. If you desire one, look for a lender offering adjustable-rate loans.

Assistance With the Down Payment for HomeReady

The 3% down payment required by HomeReady is less than half the typical down payment amount and less than the 20% that many tenants believe they would need to save up.

However, for house buyers with low income and savings, coming up with 3%—which equates to $6,000 for a $200,000 property—can be difficult.

HomeReady offers flexible sources for your down payment funds, which is helpful. You could use the following:

  • Gift money – Members of your family may be willing to contribute to your down payment by giving you the money. Please note that this must be a genuine gift, not a covert borrowing. Learn more about the conditions for down payment gifts here.
  • Homebuyer grants – Find out about local down payment help programs from your loan officer or real estate agent. Numerous NGOs and local governments provide this.
  • Loans for down payments – The Community Seconds program from Fannie Mae can assist you in obtaining a second loan designed to pay for your closing expenses and down payment. Assistance with the down payment may also include a low- or no-interest loan.

By using a second mortgage, such as Community Seconds, you will place a second lien on your house, which means that if you sell or refinance, you will be required to pay off both debts.

FHA Loans vs. HomeReady Loans

Like HomeReady loans, FHA loans assist borrowers in overcoming the costs associated with homeownership.

You could be eligible for FHA if you meet the requirements for HomeReady. Which mortgage scheme is superior, though?

Since 1934, FHA loans have been used by renters who don’t have much money for a down payment. The lowest down payment required by FHA is 3.5%, slightly more than HomeReady’s 3%.

Although these two financing plans have some significant variations, the down payments are comparable.

When Is a HomeReady Loan Superior to an FHA Loan?

Borrowers with weaker credit scores benefit from FHA the most.

You could borrow with just 3.5% down if your FICO were as low as 580. (Borrowers with scores between 500 and 579 may still be eligible, but they’d need to put down at least 10%.)

Lenders can provide clients with lower credit scores with better loan conditions because to support from the Federal Housing Administration.

HomeReady, in comparison, emphasizes the borrower’s credit; usually, you must have a score of at least 620 to be eligible.

Since the FHA program doesn’t have an income cap, unlike HomeReady, it also works best for those with higher incomes.

When Is a HomeReady Loan Preferable to an FHA Loan?

When it comes to the income verification process, HomeReady loans give greater flexibility.

Lower-income borrowers, for instance, may apply with one or more co-borrowers.

If you want to live with a roommate or rent a room, you may also include extra income from the boarders’ rent. Although you do not have to list the tenant on your loan application, you must provide proof that they have lived with you for at least a year before applying.

Additionally, as HomeReady is a conventional loan, private mortgage insurance (PMI) can be canceled once the loan has been paid down to 80% of the property’s value. Your monthly mortgage payments would significantly decrease as a result.

In contrast, unless you put down 10% or more, FHA’s mortgage insurance coverage is valid for the duration of the loan.

But keep in mind that to be eligible for HomeReady, your income must be 80% or less than the median income in your area.

Freddie Mac Home Possible vs. Fannie Mae HomeReady

The Possible Home program from Freddie Mac operates similarly to HomeReady from Fannie Mae.

Like the HomeReady initiative, the Home Possible loan from Freddie Mac:

  • Accepts a 3% down payment.
  • Has an income cap of 80% of the median income for the area
  • Is the co-borrower amicable

The minimal credit score is one of the most significant distinctions between these two schemes. For a HomeReady loan, many lenders need a credit score of at least 660. On the other hand, HomeReady is ordinarily accessible to borrowers with a FICO score of 620 or above.



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