If you are a first-time homebuyer or have a lower income, you may wonder what programs are available to help you achieve homeownership. Fortunately, with Freddie Mac’s Home Possible Program, borrowers that meet certain income guidelines can more easily qualify for a mortgage.
What is the Freddie Mac Home Possible Program?
The Home Possible Program is a mortgage program sponsored by Freddie Mac to make homeownership more attainable for first-time and low to middle-income borrowers.
Freddie Mac guarantees the loan for borrowers who meet certain requirements, which encourages lenders to approve loans for applicants who would not typically qualify through a conventional mortgage process.
What is the Down Payment for a Home Possible Mortgage?
The down payment requirement for all Home Possible Mortgages is 3% of the purchase price, though down payment funds can be satisfied through a family gift, Employer Assisted Homeownership (EAH) programs, or a secondary financing option that qualifies for Freddie Mac’s Affordable Seconds® program.
Who are Home Possible Loans for?
While anyone looking for an affordable mortgage option may want to explore their qualifications for a Home Possible Mortgage, there are two qualifications that make borrowers an excellent candidates for this Freddie Mac program.
The term “first-time homebuyer” can be a bit of a misnomer; Freddie Mac defines a first-time buyer as anyone who has not owned residential property within the previous three years. If you’re exploring homeownership for the first time, or if it’s been several years since you’ve owned a home, the Home Possible Mortgage could be a great option to explore.
Since Freddie Mac’s mission involves making homeownership affordable for all, the Home Possible Program was designed specifically to target low-income borrowers. Freddie Mac defines low income as 80% of the geographical area’s median income, though there are more specific limitations in the fine print of the program. More specifics on income requirements and limitations are reviewed later in this article.
Home Possible Eligibility
Freddie Mac outlines several eligibility criteria for borrowers including:
A credit score of 660 or higher
A debt-to-income rate of 43% or lower
A down payment of 3%
Proof of stable employment and income
A combined income for all borrowers of no more than 80% of the area’s median income
Proof that at least one borrower will be a full-time resident in the property
While these are the minimum requirements set forth by Freddie Mac, some lenders may have additional qualification requirements or might have limits that are more stringent than the Freddie Mac guidelines.
Home Possible Income Limits
Since income levels and home prices vary greatly across the country, the Home Possible eligibility guidelines for income fluctuate, based on zip code. To qualify for the Home Possible program, the combined income of all borrowers must not exceed 80% of the area’s median income.
In Minneapolis, Minnesota, for example, the median income is $104,300, so the income limits for Home Possible borrowers in that area would be $83,440 (80% of $104,300). Comparatively, the median income for Lebanon, Tennessee is $82,300, so the income limits for Home Possible borrowers in that area would be $65,840.
To make things easier for potential borrowers exploring the program, Freddie Mac put together a helpful eligibility map that displays median incomes and Home Possible income limits across the country.
Home Possible Loan Limits
Freddie Mac uses conforming loan limit rules, which change annually, to determine the maximum loan amount a borrower qualifies for under the program. The conforming loan limits in 2022 for one-unit properties are between $647,200 and $970,800, depending on the zip code.
Education Requirements for Home Possible
In addition to the organization’s mission of making housing affordable, Freddie Mac also encourages responsible homeownership. All first-time homebuyers must complete a homeownership education course provided by a HUD-approved education agency. In addition to several in-person options, Freddie Mac offers several convenient online course options through CreditSmart or ReadyNest.
Pros of the Home Possible Program
The Home Possible program comes with quite a few advantages, so let’s break them down.
Low Down Payment
The Home Possible Program offers a lower down payment than FHA loans. Home Possible loans require only 3% down (compared to the FHA minimum of 3.5%) and offer several options for gathering down payment funds without digging into your own pocket.
Potentially Lower Interest Rates
The interest rates on Home Possible loans are on par with the Conventional 97 loan, which are typically lower than interest rates offered for FHA loans. Interest rates will vary based on the lender, loan to value (LTV) ratio, borrowers’ credit scores and other factors. But assuming you meet the requirements, you could qualify for a lower interest rate with Home Possible than with other mortgage programs.
Freddie Mac does grant an exception for non-occupant co-borrowers, meaning not all borrowers are required to live in the home. At least one borrower must occupy the property after closing, so Home Possible won’t work for investment properties, but the non-occupant allowance can help borrowers with lower credit to qualify with a co-signer.
Low Monthly PMI Cost
You may spend significantly less on Private Mortgage Insurance (PMI) costs, especially if you have a larger down payment. FHA loans require 0.85% of the loan amount per year for most borrowers, but Home Possible borrowers could qualify for PMI as low as 0.5%, depending on credit scores and the LTV ratio. Even better, PMI can be removed from a Home Possible loan entirely once the LTV ratio drops below 80% (meaning at least 20% of the property value has been repaid).
No Up-Front Mortgage Insurance Cost
In addition to monthly PMI costs, FHA loans require an up-front mortgage insurance fee of 1.75% of the loan. With Home Possible, there are no up-front mortgage insurance costs.
Cons of the Home Possible Program
As with any mortgage program, there are always a few drawbacks. It’s important as a borrower to be aware of them.
The income of all borrowers on the loan must not exceed 80% of the median income for the area where the property is located. Borrowers in certain areas with lower median income levels may have trouble meeting this qualification requirement.
While there is no specified maximum loan limit for Home Possible, the qualifications for participating in the program limit the size of the loan. Since borrowers can only earn 80% of the median income for their area and the maximum debt-to-income ratio (including the Home Possible mortgage) is 43%, your maximum loan limit under the program will be affected by your geographic area, your current income and your existing debt.
Higher Credit Score Requirements
Home Possible requires a minimum credit score of 660 for all borrowers. These score requirements are higher than other programs like FHA (with a minimum score of 580) or Fannie Mae’s HomeReady program (with a minimum score of 620).
Although non-occupant borrowers are allowed on the loan for one-unit properties, at least one of the borrowers must reside in the home full-time after closing. This requirement means Home Possible cannot be used for vacation homes or investment properties where the borrower does not live on-site.
Home Possible vs HomeReady Program
First-time homebuyers or low-income borrowers may be exploring a variety of mortgage options to achieve homeownership. In addition to Freddie Mac’s Home Possible Program, a similar option is available through Fannie Mae’s HomeReady Program.
The two programs are similar in that they both target first-time and low-income borrowers and offer similar benefits in the form of low down payments, cancellable PMI, and comparable qualification requirements. The biggest difference is the credit score requirements. The Home Possible financing requires a minimum of 660, while HomeReady borrowers can qualify with scores as low as 620.
To determine which home loan program is best for you, talk with a Paddio loan expert today.