Finding the right mortgage to finance your home is a pivotal decision when embarking on the homeownership journey. Notably, for those who find the traditional 20% down payment a challenge, two prominent mortgage options available through Fannie Mae and Freddie Mac cater to this need: HomeReady and Home Possible. This article will guide you through the benefits of these two loan programs, specifically HomeReady, elucidate their requirements, and provide insights into the application process.
HomeReady Mortgage: A Helping Hand for Homebuyers
The HomeReady mortgage program is a financial advantage for prospective homebuyers, offering adjustable underwriting guidelines with a certain degree of flexibility in loan terms. What sets it apart is the ability for borrowers to secure their dream home with just a 3% to 5% down payment or reduced closing costs. Fannie Mae conceived HomeReady as an alternative to FHA loans, similar to Freddie Mac’s Home Possible program, albeit with some distinctions.
HomeReady vs. Home Possible: Two Avenues to Affordable Homeownership
While HomeReady and Home Possible have subtle differences, both are tailored to cater to lower-income and lower-credit-score borrowers aspiring to build wealth through homeownership. HomeReady, financed through Fannie Mae, eases the path to homeownership by reducing down payment and mortgage insurance requirements. On the other hand, Home Possible, backed by Freddie Mac, extends similar benefits for low to moderate-income homebuyers.
Benefits of HomeReady
The HomeReady Program addresses some of the primary challenges faced by potential home buyers and can accelerate the homeownership journey:
- Low Down Payment: HomeReady requires only a 3% down payment, significantly reducing the initial cash requirement for purchasing a home. This low down payment is a game-changer for those struggling to save up for a traditional 20% down payment.
- Gift Allowance: Fannie Mae allows all the necessary cash for the transaction to come from a gift provided by an immediate family member. This means parents can help their children purchase a home, potentially boosting their financial future.
- Assistance with Closing Costs: HomeReady permits lenders and sellers to cover most or all required closing costs, further reducing the upfront expenses. The seller’s credits may slightly affect the home’s price. Additionally, the Seller, Builder, and Real Estate Agent are eligible to cover a temporary buydown for the borrower’s interest rate as part of the transaction under HomeReady. Learn more about temporary buydowns here: Temporary Buydown Article.
- Co-borrowing with Parents: Parents can also co-borrow with their children to help meet the income requirements. This can be helpful, especially when the child’s income alone doesn’t qualify.
- Boarder and Household Income: Additional sources of income, such as rental income from boarders or household income, can be considered to help meet qualification criteria within certain limits.
- Lower Mortgage Insurance: HomeReady requires less mortgage insurance coverage, resulting in lower monthly mortgage insurance payments. Borrowers can also pay the premium through a slightly higher interest rate, potentially making it tax-deductible.
- No First-Time Buyer Requirement: Unlike some other programs, HomeReady doesn’t require applicants to be first-time home buyers. However, they cannot own another home when closing a HomeReady transaction unless it’s a case of parents assisting their children.
- Flexible Income Requirements: HomeReady has income limits set at 80% of the area’s median income, but these limits can be waived or increased in lower-income neighborhoods.
- Alternative Credit History: Including rent and utility payments, offering a lifeline to those with less-than-perfect credit scores.
- Higher Loan Amounts: Depending on the location, HomeReady can be used for loan amounts ranging from $766,550 with a 3% down payment to $1,089,300 with a 5% down payment in high-cost areas.
- Refinance Options: HomeReady allows refinancing at up to 97% of a home’s value, providing opportunities for homeowners who previously couldn’t refinance due to a lack of equity.
Eligibility for HomeReady Loans
To qualify for these programs, you must meet specific criteria:
A minimum qualifying credit score stands at 620 for HomeReady loans. This lower threshold opens doors for those with less-than-perfect credit, and alternative credit history can be considered.
You must not own any other residences, although being a first-time homebuyer isn’t a strict requirement.
The program also requires completion of homeownership education courses, involving 4 to 6 hours of approved training, to equip you for the responsibilities of homeownership.
Navigating the HomeReady Income Guidelines
Income eligibility plays a pivotal role in HomeReady approval. Your income must not exceed 80% of your county’s area median income (AMI). However, exceptions come into play for those in low-income areas, where the income limits may be more forgiving. Check your HomeReady & Home Possible Area Median Income eligibility here: Fannie Mae Lookup Tool & Freddie Mac Lookup Tool.
The Lowdown on Down Payments
HomeReady’s low down payment requirement is a major draw for prospective buyers. You can fund up to 97% of a single-family home, necessitating a mere 3% down payment. Furthermore, generous gift contributions are permitted to cover the down payment entirely.
Property Types and Mortgage Terms
HomeReady can be applied to various property types, from single-family homes to planned unit developments, townhouses, and condos. Mortgage terms vary, with fixed-rate options offering predictable payments over different lengths.
However, it’s essential to note that adjustable-rate mortgages (ARMs) are unavailable for these programs and do not apply to second homes or investment properties.
Considering FHA Loans as an Alternative
FHA loans are government-backed alternatives that share similarities with HomeReady and Home Possible. They offer lenient financial requirements, such as a low 3.5% down payment. FHA loans might be a suitable option if you need more flexibility to qualify.
The Bottom Line
In summary, Fannie Mae’s HomeReady Program is a valuable resource for individuals looking to purchase or refinance a home, especially those facing financial challenges. It provides a pathway to homeownership with lower down payments, gift allowances, and flexible qualification criteria. Whether you’re a first-time buyer or looking to improve your financial future, HomeReady is worth considering. To explore your HomeReady options, start by contacting Starwest Mortgage to get pre-approved for the program. Don’t let the financial barriers of saving for a hefty down payment delay your journey to homeownership; HomeReady is here to help.