Qualifying for a mortgage can be both confusing and difficult for many borrowers. With so many different mortgage types and eligibility criteria, it’s hard to know which loan product is right for you.
Lower income borrowers may feel stuck and find saving the standard 20% for a down payment especially difficult.
The good news is that there are options for those trying to buy a home with lower income, such as government-backed loans and even more lenient conventional loans. However, even these loan types can be difficult to qualify for at times. Enter Fannie Mae’s HomeReady mortgages -a popular alternative for those with a low income and only require a small down payment.
What is a HomeReady Mortgage?
A HomeReady mortgage is a loan sponsored by Fannie Mae and is designed to help people with low-to-moderate income and good credit buy a home.
This mortgage program allows as little as a 3% down payment which is lower than most conventional loans. The program also offers low financing and mortgage insurance costs, making it an appealing alternative to conventional loans.
Do I Qualify for a HomeReady Mortgage?
Like with any mortgage, you will need to meet some basic requirements to get approved.
The home must be your primary residence. This means that you cannot use a HomeReady mortgage to buy a for-rent investment or to flip properties.
Your debt-to-income ratio (DTI) must be no higher than 50%.
Your credit score should be 620 or higher, though this might depend on the lender’s individual requirements.
What is the Maximum Income for a HomeReady Loan?
As the Fannie Mae HomeReady program is designed for lower-income people who need it most, there are some limits on how much you can earn to qualify.
Potential borrowers cannot earn more than 80% of their area’s median income (AMI) to qualify for a HomeReady loan. This means if the AMI in your area is $100,000, you must make $80,000 or less to qualify for the program.
However, if you live in a low-income area—or a zone where the median household income is 20% lower than the location’s average AMI—there are usually no income limits. Properties in high minority areas and disaster areas have an income limit of 100% of the area’s median income.
To check your eligibility, you can use Fannie Mae’s HomeReady eligibility checker to look up your address’ AMI.
Those who have a higher income will usually be better suited to conventional loans or even certain government-backed loans such as VA loans if they qualify.
What is the Credit Requirement for a HomeReady Loan?
The HomeReady loan program aims to be flexible so you don’t need perfect credit to qualify. A FICO score of 620 is usually enough to qualify, which is slightly lower than the minimum credit score required for Home Possible loans from Freddie Mac.
However, a credit score of 680 and above will get you the best rates, and in some cases, Fannie Mae waives upward rate adjustments for borrowers with credit scores this high.
Education Requirements for HomeReady Mortgage
Another requirement for a HomeReady mortgage is that the borrower completes a homebuyer education course. This is an online course and can be done at your own pace, but typically takes 4-6 hours to complete. There is a fee of $75 for this course which teaches you everything you need to know about homeownership.
Fannie Mae requires this because it believes that "financial literacy and foundational homeownership education is critical to successful homeownership."
Benefits of a HomeReady Mortgage
A HomeReady mortgage offers several benefits to borrowers that may be more appealing than other loan types.
It’s not just for first-time buyers
HomeReady mortgages are ideal for first-time buyers and those struggling to get onto the property ladder. However, they are also open to repeat buyers as well.
Low down payments
One of the top benefits of a HomeReady mortgage is that it only requires a 3% down payment. This reduces one of the biggest barriers to buying a home.
Low private mortgage insurance (PMI)
Private mortgage insurance typically applies when the down payment is less than 20%. However, one of the benefits of a HomeReady mortgage is that even if your LTV is above 90%, the standard PMI costs can be reduced. Once your LTV reaches 80%, you can request to have PMI canceled. PMI will automatically be canceled once you reach 78% LTV.
Flexibility on the source of your down payment
With conventional mortgages, lenders can be strict on the source of your down payment.
Most mortgages require a “minimum contribution” from the borrower. This means that the borrower must come up with a certain portion of the down payment on their own. Beyond that minimum contribution, borrowers can usually make up the rest of their down payment with other sources of funds such as gifts or down payment assistance programs.
However, HomeReady mortgages are more flexible. The HomeReady program allows 100% of the down payment to come from gifts, personal savings or other sources. In other words, a relative or friend can give the entire down payment and closing costs to the borrower.
Flexibility on the source of income
Another area where potential borrowers struggle is with the source of income. Most lenders will want to see regular, employment income to cover the cost of the mortgage repayments. However, the HomeReady program is more flexible.
The program accepts a range of different income sources to qualify in affordability checks including:
Regular income - This could be employment income, bonuses, commission or even income from tips.
Household income - Buyers can use income from other household members to qualify, even if they will not be on the loan. However, other household members’ income can’t be used to make an approval decision. Rather, their income can be considered as a reason to approve a borrower with a high debt-to-income ratio (over 45%).
Co-signer income - Income from non-occupants who are considered co-borrowers can be considered for mortgage qualification.
Boarder or roommate income - A border’s income can be used if they have been renting space in your household for at least 12 months.
Rental income or income from “mother-in-law” units - If you plan to rent a property with a basement apartment or a mother-in-law unit, you could use rental income from that to qualify for the mortgage.
What is the Difference Between HomeReady and Home Possible Loans?
While HomeReady mortgages are backed by Fannie Mae, Freddie Mac offers something similar called a Home Possible loan. Home Possible loans are also designed to help low-to-moderate income buyers purchase a home. And both programs require lower down payments than other types of loans, have lower mortgage insurance requirements, and offer flexible eligibility criteria.
The main difference between the two programs is that Home Possible loans typically require slightly higher credit scores. Home Possible loans usually require a minimum score of 660, whereas HomeReady loans will accept a score as low as 620.
See if the HomeReady Program is Right for You
HomeReady mortgages are a great choice for those who want a more flexible way to purchase a home with a low down payment. However, other programs such as VA loans, FHA loans or Freddie Mac’s Home Possible program may also be suitable for you.
The best thing you can do is to get in touch with a loan specialist at Paddio to learn more about the HomeReady program and other lending alternatives.