Mortgage Daily

Published On: December 15, 2022

The 3% Down Mortgage From Freddie Mac

Home purchasers in today’s market confront several challenges. You might be concerned about saving for a down payment or purchasing a home with a low salary. Your credit score might need improvement.

A Freddie Mac Home Possible loan can be the best option if you are struggling with any of these obstacles.

The Home Possible mortgage program offers less stringent lending standards than other loan kinds, and it only takes as little as 3% down. Therefore, it may be perfect for many first-time purchasers who want a boost.

What Is the Lending Program Home Possible?

Some mortgage lending programs demand that you fulfill rigorous income standards, put between 10 and 20% down on a house, and have a desired credit score.

These are a few factors that lead many first-time homebuyers and homeowners wanting to refinance to doubt their ability to obtain mortgage financing.

Thankfully, there are several programs available to assist these borrowers. There are solutions to help, whether you require a small down payment, lenient credit standards, or income flexibility.

One such initiative is Home Possible, supported by the government-backed company Freddie Mac.

Freddie Mac Home Possible 101

Borrowers with lower incomes who would not otherwise be eligible for mortgage financing are the focus of the HomePossible mortgage.

This initiative lowers the entrance hurdles, making homeownership more accessible: To be specific, a HomePossible loan requires a 660 credit score and a 3% down payment.

Jared Maxwell, vice president of Consumer-Direct Lending at Embrace Home Loans, notes that “Freddie Mac Home Possible gives additional possibilities to meet a range of borrower conditions.”

According to Maxwell, this program offers payment alternatives and flexible down payment assistance to help individuals whose income exceeds 80% of the region’s median income.

You may avoid paying the 3% down payment out of pocket with Home Possible.

Money may come from a family member’s gift or even a program that helps people with down payments.

Remember that Freddie is not a lender, even if Freddie Mac supports this lending program.

Since private lenders issue Home Possible loans, borrowers can look at and compare interest rates for their mortgage provider.

Home Possible Eligibility 

You must satisfy Freddie Mac and your lender’s eligibility standards to qualify for a HomePossible mortgage loan. You’ll require, in brief:

  • 660 or higher on the credit report
  • A down payment of 3%
  • A DTI under 43%
  • Consistent earnings and employment
  • A household income of no more than 80% of the median for your location
  • You will use the house as your primary dwelling.

According to Ralph DiBugnara, the creator of Home Qualified, “HomePossible is available to anybody who makes less than 80% of the typical monthly income for the ZIP code they will be purchasing.”

In addition, all loan applicants must have a minimum FICO credit score of 660, and the property must be owner-occupied by at least one of them. Additionally, the program is exclusively accessible to single-family homes, according to DiBugnara.

Home Possible loan criteria also include the following:

  • If the loan is accepted through Freddie Mac’s automated underwriting system, a debt-to-income (DTI) ratio of 43% or less. Alternatively, if the loan is manually underwritten, a DTI of 45% or less.
  • An LTV ratio of 97% or less (i.e., a down payment of at least 3%). The maximum LTV is 105% if you have several mortgages or a second mortgage, which may be utilized to fund the down payment.

While first-time home buyers are eligible for this program, anyone who has previously owned a home or has an interest in another residential property may be qualified as long as their income is at or below 80% of the area median income. At least one borrower resides in the property as their primary residence, according to Maxwell.

He says, “The loan officer will submit the application as a human underwriter if the lender permits it, or will run the application via Freddie Mac’s automated underwriting system to certify the loan fits the qualifying conditions.”

Another benefit? You may be eligible if you have a co-signer for the loan.

According to Imani Francies, a mortgage specialist with Loans.org, “Non-occupant co-clients are allowed in this program, which means you can qualify with the income of a parent or other person who agrees to co-sign the loan with you.”

It should be noted that if all occupied borrowers are first-time purchasers or all borrowers’ credit histories are calculated using atypical payment records, at least one borrower must participate in a homeownership education program.

Home Possible Income Ceilings

Since the middle of 2019, Freddie Mac has mandated that a borrower’s qualifying income shall not be more than 80% of the area median income (AMI) for the region where the mortgaged house is located when expressed on an annual basis.

“Although the program only requires a small down payment, Home Possible mortgages have risk management features that promote responsible financing. Your annual income is thus not allowed to surpass this limit, says Francies.

Use the Home Possible income and property eligibility calculator to more accurately ascertain your eligibility.

Mortgage Insurance and Interest Rates for Home Possible

Mortgage interest rates from Home Possible are competitive with those of other traditional loans with modest down payments. Therefore, with the HomePossible program, consumers may take advantage of the current cheap mortgage rates.

Of course, several criteria, such as your lender, loan length, and credit score, may affect the interest rate you are eligible for.

Be warned that a HomePossible loan will also need you to pay for private mortgage insurance (PMI). Your monthly mortgage payments will go up because of this.

The good news is that once your loan total falls below 80% of the home’s appraised value and cancellation requirements are satisfied, mortgage insurance for 1-unit houses may be canceled. Additionally, the requirements for mortgage insurance coverage are dropped for LTV ratios exceeding 90% (i.e., when you put down 10% or more).

Alternatives to the Home Possible Loan From Freddie Mac

Of course, there are other low down payment options besides the Home Possible loan. Additionally, you can be eligible for specific home financing schemes, such as:

  • 3.5% down payment, a minimum FICO score of 580, and a maximum DTI ratio of 43% are required for an FHA loan.
  • conventional loan 97 (issued by Freddie Mac and Fannie Mae). Requirements: 3% down payment; 620–660 FICO credit score requirement; 50% debt-to-income ratio cap; 97% maximum LTV ratio
  • Home by Fannie Mae Ready loan — Requirements: 3% down, a minimum FICO credit score of 620-680, a maximum DTI of 50%, a maximum LTV of 97%, and an annual income that cannot be higher than 100% of the area’s median income.
  • 0% down payment, a minimum FICO score of 580 to 660, a maximum DTI of 41%, and the need to be a veteran, active-duty military member, or veteran’s spouse are the requirements for a VA home loan.
  • USDA loan — Minimum credit score of 640; maximum DTI of 41%; yearly income cap of 115% of region median income; must purchase in designated rural areas

If you don’t qualify for or choose not to seek a HomePossible loan, an FHA loan is likely your best alternative, according to Francies.

The former is available to borrowers with low to moderate incomes and is insured by the Federal Housing Administration. It offers a lower minimum down payment and credit score requirement than many conventional loans.

Another excellent choice supported by Fannie Mae is the HomeReady loan.

HomeReady and Home Possible are comparable in many aspects. In addition, you can use household members who aren’t the borrower’s income to boost your eligibility. If a parent or roommate lives with you but isn’t applying for a mortgage, for example, their income could still assist you in getting the loan.

 

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