Fannie Mae HomeReady mortgages are a great program for credit worthy borrowers who may have a lower income or down payment. You can pay as little as 3% down, even less than the 3.50% minimum down payment on an FHA Loan, which helps many with their goal of homeownership.
Plus, you are allowed the use of gifts funds, grants, or a down payment loan to help cover upfront costs. And co-borrowers living in the home or outside of it can be on your application. All of these factors add up to positive factors in allowing first time home buyers the opportunity to qualify for this program.
About HomeReady Loans:
This program allows for only a 3% down payment and a variety of different income sources to help strengthen your application.
You are able to use income from a non-occupying co-borrower which can potentially help to lower the debt to income ratio. With the proper documentation rental income can also be utilized if purchasing a multi-family home.
For some families, these unique rules can mean the difference between getting approved for a loan and getting turned down.
How to Qualify:
Some basic requirements of this loan type are:
· Income Limits: There is a household income limit of 80% of the area median income. (For 2023 the Erie County, NY HomeReady Income Limit is $70,160)
· Online Homebuyer Education class for First Time Homebuyers
· A credit score of 620
· Must be a Primary Residence
· Debt to Income Ratio of 46% or lower (With higher credit scores you can potentially get approved with up to a 49% DTI)
For the Area Median Income in your county check here. https://ami-lookup-tool.fanniemae.com/amilookuptool/
Meeting the above criteria could mean that you are well on your way to homeownership!
Down Payment Sources:
Although the lower minimum down payment of 3% is very helpful for most borrowers HomeReady allows for a variety of sources for down payment and closing costs on top of this. Gift funds are allowed from family members as long as there is the proper documentation and the money gifted is not required to be paid back similar to another loan. HomeReady allows for eligible grants or a down payment loan (community second) and a CLTV (Combined Loan to Value) of up to 105%.
Fixed Rate Options:
HomeReady Loans are available in 10 year, 15 year, 20 year and 30 year fixed rate mortgages. This array of options allows borrowers to choose a shorter term fixed rate mortgage which can save you thousands in interest over the life of the loan. However, a 15 year mortgage has a much higher monthly payment than that of a 30 year mortgage which can effect debt to income ratios and cause them to increase.
There are many options in terms of property type when using a HomeReady Loan, the most common being a single family primary residence. Manufactured homes are allowed as well as 2-4 unit multi-family primary residences. Please keep in mind if you are looking to buy a multi-family home the credit score requirement may be higher than if you are purchasing a single family home.
HomeReady vs. FHA:
FHA Loans work best for borrowers who have lower credit scores as their credit score requirements are lower than HomeReady which is a conventional loan product. FHA also is a great product for borrowers with lower credit scores and have higher income since there are no income limits on FHA loans. However, HomeReady sees its advantages when it comes to private mortgage insurance or (PMI). Since it is a conventional loan product the PMI is cancellable after you have paid the loan down to 80% which is in contrast to FHA where the PMI lasts for the life of the loan unless you put down 10% or more in which case the FHA PMI drops off after 11 years.
Home Possible Mortgages:
Freddie Mac also has a conventional 3% down payment program called the HomePossible mortgage. This program is very similar in that it allows for a 3% down payment, requires an income limit of 80% of the area median income ($70,160 for Erie County, NY) and allows for non-occupying co-borrowers. One of the biggest differences is that Freddie Mac’s HomePossible requires a minimum credit score of at least 660.
Did you know:
The use of Fannie Mae’s HomeReady Loan has allowed us to use rental income on the purchase of a 2-unit primary residence. With the proper documentation we were able to use the monthly rental income generated from the other unit to help a lower income borrower qualify for their home purchase. The use of this rental income, which was not available to them thru other products helped lower the debt to income ratio to meet the guidelines set forth by Fannie Mae. These products along with many others are all there to help secure homeownership for you that has the best interests in mind for both borrowers and lenders.