Down payments don’t grow on trees ???.
Between high rents, deepening student loan debt, and the cost of living going up – it can take a long time to save the traditional 20% down payment.
Even buyers with good credit scores can still face challenges when it comes to buying a home. They may not have much money saved up for a down payment and lenders may consider their salary too low to qualify for a loan.
Fannie Mae’s HomeReady® mortgage loan program was created to help lower-income borrowers with high credit scores get into homes of their own. HomeReady® loans feature competitive interest rates and a high level of flexibility.[1]
What Is a HomeReady® Mortgage Loan?
HomeReady® mortgage loans are conventional loans backed by Fannie Mae that help creditworthy, low- to moderate-income borrowers buy or refinance a house when they can’t afford a typical down payment.
The Federal National Mortgage Association (FNMA) is a privately held company (with government oversight) that sets national standards for mortgages to make sure they remain affordable for everyone.
HomeReady loans® are a great option for low-income borrowers with good credit. They offer low interest rates, lower mortgage insurance costs and lower fees on top of the low down payment requirement. Forget a double rainbow ? – that’s a quadruple!
Who Is a HomeReady® Loan For?
HomeReady® loans help meet the needs of repeat or first-time home buyers who have:
- Lower income
- Good credit
- Little down payment saved
- Supplemental income (that’s any ? you earn beyond your paycheck)
What Are the Benefits of a HomeReady® Loan?
There are many benefits to a HomeReady® loan. Here are the highlights:
A low minimum down payment requirement
Borrowers can qualify with a down payment as low as 3% of the home purchase price. This is the same as the conventional loan minimum and lower than the down payment required for an FHA loan ( which is 3.5%).
Flexibility around eligible income sources
The HomeReady® program has generous policies around qualifying income.[2] It benefits home buyers who think their salary is too low to qualify for a mortgage loan.
You can give your qualifying income a boost by adding the income of other members of your household to the application. You can also use the income you’ve made from renting a room in your home for at least the past year.
Not only can home buyers applying for a HomeReady® loan use supplemental income on their loan application – it can be 100% of the income they apply with. ?
Less costly mortgage insurance requirements
When a home buyer has a conventional loan with a loan-to-value (LTV) ratio at or above 80%, they typically end up having to pay private mortgage insurance (PMI) until the LTV of their home drops below 80%.
That doesn’t have to happen with a HomeReady® loan.
HomeReady® loans give homeowners with a high LTV ratio a chance to reduce – and maybe even cancel – their PMI.
Like any conventional loan, if you get a HomeReady® loan with an LTV above 90% (but less than 97%) and eventually get your LTV down to 80%, you can ask your lender to cancel your PMI.
So, keep an eye on your LTV! You don’t want to get so busy with other life stuff that you don’t notice your LTV dropping, and you potentially miss out on hundreds of dollars in savings.
And, if your LTV keeps dropping and dips below 78%, it’ll get canceled automatically. Cheers to that!
The Nuts and Bolts of a HomeReady® Loan
HomeReady® loans look a lot like traditional conventional mortgage loans in two areas: interest rates and repayment terms.
HomeReady® loan interest rates
The interest rates for HomeReady® loans are based on the same market rates as other conventional loans. As with other types of loans, your HomeReady® lender will set your specific interest rates based on your credit score, down payment and other financial factors.
HomeReady® loan repayment terms
Your loan repayment term is the length of time you have to pay off the loan. The HomeReady® loan program offers a range of repayment term options for fixed-rate mortgages and adjustable-rate mortgages (ARMs).
Fixed-rate repayment term options:
- 10 years
- 15 years
- 20 years
- 30 years
ARM repayment term options:
P.S.: If you’re new to the whole 5/1, 7/1 thing … 5/1 means that the ARM’s interest rate is fixed (stays the same) for the first 5 years of the loan. After 5 years, it adjusts to a new rate every year.
How Do You Qualify for a HomeReady® Loan?
Multiple types of homes qualify as long as the borrower lives there as their primary residence:
- Single-family homes
- Multifamily homes no larger than 4 units
- Manufactured homes
- Co-ops
- Condos
- Townhomes
- Planned-unit developments
If you’re buying a multifamily home, it’ll count as a primary residence as long as you live in one of the units full time.
As with all home loans, specific requirements will differ by lender, but the minimum requirements set by Fannie Mae for all HomeReady® loan applications are:
- Credit score: The minimum credit score to qualify is 620. A borrower with a credit score of 680 or higher is likely eligible for lower interest rates and smaller fees.
- Debt-to-income (DTI) ratio: You can have a DTI ratio as high as 50% and still qualify for a HomeReady® loan.
- Homeownership education: Fannie Mae requires HomeReady® borrowers to take a 4- to 6-hour homeownership education course (available online or in-person) before getting loan approval.
- Income limit: The income limit for all HomeReady® loans is 80% of the median income where the home is located (and there is no minimum income required). Use Fannie Mae’s online income tool to determine your eligibility.
- Down payment: You can put as little as 3% down on a house when you use a HomeReady® loan. And there is no limit on the amount of money that can come from other sources (like gifts and grants) and be applied to your down payment.
A Fannie Mae Community Seconds® loan can help HomeReady®-eligible borrowers pay a 3% down payment and/or closing costs if they can’t cover them with gift or grant money.[3]
Alternatives to a HomeReady® Loan
If you don’t qualify for a HomeReady® loan – or even if you do – it’s worth considering a few alternatives.
Freddie Mac Home Possible® loan
Freddie Mac (another national, privately held backer of mortgage loans) works under strict government oversight. Its Home Possible® loan product has nearly identical requirements to the HomeReady® loan but has a higher minimum credit score requirement (660).
FHA loan
FHA loans are government-backed loans that have a low down payment requirement (3.5%) and a low minimum credit score requirement (500). Your score needs to be 580 or higher to qualify for a 3.5% down payment. If your credit score falls between 500 – 579, you have to put 10% down.
Because of the low credit score requirement, FHA loans are easier to qualify for, but when it comes to making a down payment, the bar to qualify for an FHA loan starts to rise.
Similar Loans in the Sea: A Side-by-Side Comparison of HomeReady®, Home Possible® and FHA Loans
Individual lenders will set specific requirements for a borrower based on their overall financial situation, as well as the type of property they’re trying to buy.
However, here are the basic requirement guidelines for each of these loans:
| ? Fannie Mae HomeReady® Loan[4] | ? Freddie Mac Home Possible® Loan[5] | ? FHA Loans[6] | |
| House Residency | Primary residence | Primary residence | Primary residence |
| Minimum Credit Score | 620 | 660 | 500 |
| Maximum DTI | Typically 50% | Typically 45% | 43% preferred but can be as high as 50% (based on your credit score and your overall financial situation) |
| Maximum LTV | 97% | 97% | 96.5% |
| Income Limit | 80% of the area’s median income | 80% of the area’s median income | No income limits |
| Minimum Down Payment | 3% | 3% | 3.5% (580+ credit score) or 10% (500 – 579 credit score) |
| Mortgage Insurance | HomeReady® borrowers pay private mortgage insurance (PMI) as a part of their monthly mortgage payment. Borrowers can reduce and/or cancel their PMI – even if their LTV was above 90% when they took out the loan. | Home Possible® borrowers pay private mortgage insurance (PMI) as a part of their monthly mortgage payment. Borrowers can reduce and/or cancel their PMI – even if their LTV was above 90% when they took out the loan. | FHA borrowers pay an upfront mortgage insurance premium (UFMIP) – which can be folded into the loan – and also pay a monthly mortgage insurance premium. You have to pay the premium for the life of the loan if you had a 90% LTV at the time you took out the loan. |
How To Apply for a HomeReady® Loan
Applying for a HomeReady® loan doesn’t add any extra steps to the conventional mortgage application process, there are just different eligibility requirements.
Here are the steps you’ll need to take before applying:
- You need to know your credit score (it needs to be 620 or higher).
- Decide if a low down payment – and the likely higher interest rate that comes with it – makes sense for your financial goals beyond owning a home.
- Find a lender. Most lenders that offer conventional loans offer HomeReady® loans – but take your search a step further. Ask lenders if they have experience working with HomeReady® loans AND offer good loan terms (compare at least three lender offers).
Once you’ve selected your lender:
- Work with your lender to determine whether you meet all the requirements of a HomeReady® loan.
- Apply for the loan through your lender. Your lender will request financial paperwork, including proof of income (or supplemental income) and copies of your tax returns.
- Wait (patiently) as your loan goes through the underwriting process. If the lender requests any extra info during this time, it’s your job to get that question answered or paperwork sent over as quickly as you can.
- Wait on your lender for the final decision on your loan application.
Are You Ready for a HomeReady® Loan?
For many of us, the journey to homeownership can be clouded by doubt about our chances of being approved for a home loan. Mortgage programs like Fannie Mae’s HomeReady® program can provide some hope and maybe even a clear(er) path forward.
With a HomeReady® loan, that modest down payment and lower income many lenders would’ve traditionally considered too low for a conventional loan is less likely to be a barrier to owning a home.
With their availability to both first-time and repeat home buyers – and their impressive flexibility when it comes to income and down payment requirements – HomeReady® Loans are a solid option for many of us. ??