Everything You Need to Know About HomeReady Mortgages

If you want to buy a home but don’t have a huge amount of income or savings, Fannie Mae’s HomeReady mortgage program might be the perfect solution. The HomeReady program, which was created in September 2015, focuses on helping people who want to buy a home in a low-income or minority-populated area.

What Are the Major Benefits of HomeReady Mortgages?

Since they’re designed to help low-income homeowners, HomeReady mortgages have a variety of benefits, including:

• Incredibly low 3% down payment requirement

• Lower private mortgage insurance (PMI) costs than other Fannie Mae loans

• Unlike some other kinds of government loans, PMI can be canceled once an owner reaches 20% home equity

• Borrowers can use supplemental rental income in order to help quality (but usually must prove that the tenant has lived there for at least 12 months)

• Borrowers can use the income of other people in their home (parents, children, friends, relatives) to qualify

In addition to these major benefits, Fannie Mae has instituted a new rebate program. In this program, home buyers can get a $500 rebate from Fannie Mae if “at least one borrower.. obtain[s] customized one-on-one homeownership counseling from a HUD-approved non-profit counseling agency”, and gets a Certificate of Pre-purchase Housing Counseling Form (Fannie Mae Form 1017).

It’s important to note, though, that this rebate goes through the lender, and they’re not technically required (though they are encouraged) to pass it on to you. So, if you’re interested in the rebate, ask potential lenders whether they pass on the savings to their borrowers.

In addition, getting housing counseling can sometimes permit borrowers with less favorable debt-to-income (DTI) ratios to qualify for a HomeReady mortgage -- potentially allowing ratios of between 46 - 50% to qualify.

HomeReady Mortgage Down Payment Options

While we already mentioned that HomeReady mortgages only require a 3% down payment, that down payment does not have to come from traditionally approved sources. Instead, funds for a down payment can come from gifts, grants, or community seconds, a type of second mortgage that can be used to finance a down payment. Unlike conventional loans, there is no minimum amount of personal funds that borrowers are required to contribute.

Who is the Ideal Borrower for a HomeReady Mortgage?

In order to be eligible for a HomeReady mortgage, you cannot own any other residential property in the U.S., and you usually have to undergo an online homeowners course, which can take between 4 and 6 hours.

Despite that, you don’t have to be a first time homeowner to qualify. As long as you don’t own a home at the moment, you can apply. Plus, there are no limits on owning homes in other countries, owning commercial property in the U.S., or owning timeshares, so those won’t stop you from getting a HomeReady loan, either.

 Credit Score for HomeReady Mortgages

In terms of credit scores, HomeReady mortgage requirements are relatively low, with a 620 allowable minimum. If your credit is over 680, though, you’re likely to get a much better interest rate on your loan.

If you don’t have a credit score at all, you might still be able to qualify for a HomeReady loan. Fortunately, Fannie Mae allows borrowers to use unconventional methods to establish their creditworthiness, like utility payments, gym memberships, and any other regularly paid monthly bills. It still may be more difficult to get approved by your lender without a credit score -- so, if you don’t have one, check with your lender to learn more about their individual preferences. 
 

Income Eligibility for HomeReady Mortgages

Earlier in the article, we mentioned that you could use the income from others living with you in order to qualify for the minimum income requirements of the HomeReady loan. Fortunately, for borrowers, those people do not have to currently live with the borrower; as long as they agree to live with them for a 12-month period after they purchase the home. Plus, those borrowers do not have to be legal residents of the United States, and there is no maximum amount of people that a borrower can use to qualify.

In addition, to qualify for a HomeReady mortgage, you can’t exceed a certain maximum income level. In particular, your income can be no more than 100% of the area median income, as stated by HUD. Despite that, if you purchase a home in a designated low-income area, there are actually no income limits for a HomeReady loan.

HomeReady Mortgages are Also Available for Home Refinancing

If you already have a Fannie Mae mortgage, but want to refinance in order to reduce your interest rates, a HomeReady mortgage could also be a smart option -- especially since HomeReady refinance rates are typically lower than regular Fannie Mae rates. In addition, HomeReady refinancing tends to have lower closing costs than traditional Fannie Mae refinancing. And, just like regular HomeReady loans, you can still:

• Qualify with up to 45-50% DTI

• Use border/rental income to qualify

• Use non-borrower funds (i.e. gifts, grants) to pay for closing costs and fees

HomeReady Mortgages: In Review