What Is a HomeReady Mortgage?
For low-to-moderate income borrowers with good credit looking to purchase a new home, exploring the HomeReady mortgage backed by Fannie Mae could be beneficial. This program, akin to Freddie Mac’s Home Possible initiative, allows for a modest 3% down payment, unlike the standard 20%. HomeReady mortgage rates are competitively priced and on par with conventional mortgages, making it an attractive option for eligible borrowers.
### Key Takeaways
– HomeReady is a Fannie Mae program tailored for low-income borrowers.
– It facilitates low down payments, reduced financing costs, and lower mortgage insurance expenses.
– Borrowers enjoy flexibility in sourcing funds for down payments.
– A comparable program by Freddie Mac is known as Home Possible.
– Eligible borrowers need a minimum credit score of 620 to qualify, though scores of 680 or higher can lead to better pricing options.
– The down payment requirement is just 3%, significantly lower than traditional mortgages.
How HomeReady Mortgages Work
The HomeReady program is open to both first-time and repeat homebuyers, as well as those looking to refinance existing mortgages. Eligible borrowers must have a credit score of 620 or higher, and those with scores of 680 or more may qualify for more favorable pricing. HomeReady also provides affordable mortgage insurance options.
Borrowers eligible for the program have incomes at 80% or below the area median income (AMI) for the specific census tract where the property is situated, as of July 20, 2019. This includes properties located in low-income census tracts. While a HomeReady borrower may have ownership interests in other residential properties, only one of those properties can be financed when closing on a HomeReady mortgage.
Community Seconds are secondary mortgages used to cover down payments and closing costs on initial mortgages delivered to Fannie Mae.
Benefits of a HomeReady Mortgage
Apart from the nominal 3% down payment, HomeReady mortgages offer competitive loan pricing. The program also features below-standard mortgage insurance prerequisites for loan-to-value (LTV) ratios from 90% to 97%. Borrowers can cancel monthly mortgage insurance payments once the LTV drops below 80%. Furthermore, borrowers aren’t obligated to use personal funds exclusively for down payments and closing costs; they have the flexibility to utilize gifts, grants, and Community Seconds mortgages.
Another notable advantage of the HomeReady mortgage is its flexible terms. While income constraints may apply to all borrowers, a HomeReady mortgage need not solely be under the name of the property occupants. Parents and other family members can be co-borrowers, even if they don’t intend to reside in the home. For families buying a home with a rental unit, potential rental income can be factored into their eligibility assessment to enhance mortgage qualification.
### $2,500 Credit for Very Low-Income Borrowers
Fannie Mae announced in January 2024 that it will provide a $2,500 credit to borrowers with total qualifying income not exceeding 50% of the relevant area median income. This credit can be applied toward the 3% minimum contribution and is available for loans purchased between March 1, 2024, and Feb. 28, 2025.
Criticism of a HomeReady Mortgage
While HomeReady mortgages offer numerous benefits, there are drawbacks to consider. When purchasing a home with HomeReady, there are limitations on the borrowing amount. This program, through Fannie Mae, adheres to FHFA’s conforming loan limit, which in 2024 stands at $766,550 for a single-unit property in contiguous states. However, for properties in Hawaii, Alaska, Guam, or the U.S. Virgin Islands, the limit rises to $1,149,825. An issue with conforming loan limits is that in certain regions, particularly coastal areas, housing prices surpass the FHFA’s defined limit.
It’s essential to note that in areas where 115% of the median home value exceeds the conforming loan limit, the limit will be higher than the base threshold. In these regions, the loan cap for single-unit properties in high-cost areas climbs to $1,149,825. However, while you may qualify to borrow this amount based on a low-to-moderate income, taking out a loan you may struggle to afford, even if eligible, can be risky.
Special Considerations
Lenders participating in HomeReady mortgages also benefit from the program. Fannie Mae’s Desktop Underwriter (DU) system automatically identifies HomeReady-eligible loans while assessing credit risk.
Lenders can receive risk-based pricing waivers for borrowers with credit scores of 680 or higher and LTV ratios exceeding 80%. HomeReady loans can be combined with traditional loans in mortgage-backed security (MBS) pools and whole loan commitments.
What Is the Interest Rate on a HomeReady Loan?
Interest rates for HomeReady mortgages vary, similar to most loans. While individuals with credit scores as low as 620 can qualify, higher credit scores typically result in better interest rates.
Can You Put 20% Down With a HomeReady Loan?
HomeReady targets borrowers less likely to have a 20% down payment readily available. However, there is no specific prohibition against a 20% down payment.
Does HomeReady Require Mortgage Insurance?
Yes, borrowers who contribute less than 20% toward a down payment will need to pay mortgage insurance until the loan-to-value ratio drops below 80%.
The Bottom Line
HomeReady, launched by Fannie Mae, aims to facilitate homeownership for low-income individuals. Eligible participants can secure homes with as little as a 3% down payment, while those with very low income may qualify for a $2,500 credit applicable to this requirement. With a minimum credit score of 620, the program’s flexibility in funding sources for down payments sets it apart from conventional mortgages.