Looking for a home loan that requires a low down payment? Freddie Mac's Home Possible mortgage might be the right choice.
This mortgage requires a down payment of just 3% of your new home's purchase price, making getting into a home more affordable. And if your three-digit FICO® credit score isn’t as high as you’d like? You can still qualify for a Home Possible mortgage even if you don’t have perfect credit.
The catch? You must meet certain income limits to participate in this program.
What Is A Freddie Mac Home Possible Mortgage?
Freddie Mac’s Home Possible mortgage is a good option for borrowers with low or very low incomes. That’s mostly because of the 3% down payment requirement.
Coming up with a down payment is a challenge for most low-income borrowers. After all, a 10% down payment on a home costing $150,000 is $15,000 – a lot of money. But a down payment of 3% on the same $150,000 home comes out to $4,500 – a total that’s potentially more attainable.
You can gather your down payment dollars from several sources, too, including gifts from family members or financial assistance from your employer.
The Home Possible mortgage also features cancellable mortgage insurance, something that sets it apart from FHA loans. Private mortgage insurance protects your lender in case you stop making payments on your mortgage. But it's not free. Depending on the size of your mortgage, and your loan’s term, you can expect to spend 0.5% – 1.5% of your total loan amount each year for mortgage insurance. With a Home Possible loan, you can cancel mortgage insurance, and this extra fee, after the balance of your loan drops below 80% of your home's appraised value.
You can also apply for the Home Possible Advantage mortgage from Freddie Mac. It’s similar to the Home Possible mortgage but is a bit more limited. The Home Possible Advantage mortgage, also geared toward lower-income borrowers, is available to buyers purchasing only a one-unit primary residence. The Home Possible mortgage, though, is open to buyers purchasing one- to four-unit primary residences and manufactured homes. Note that Quicken Loans® does not offer financing on manufactured homes.
Home Possible allows you to apply for both fixed-rate and adjustable rate mortgages, while Home Possible Advantage restricts borrowers to fixed-rate mortgages only.
Both programs require first-time home buyers to participate in home buyer education programs to qualify. You'll be considered a first-time buyer if you haven't owned a home in the last 3 years. So even if you owned a home 5 years ago, you'll still qualify as a first-time buyer under the Home Possible requirements.
What Is Freddie Mac?
Freddie Mac isn't a home lender. It's a government-sponsored enterprise designed to keep money flowing to mortgage lenders so that those lenders can provide mortgage loans to borrowers who want to buy homes.
Freddie Mac does this by purchasing loans from lenders to replenish their supply of funds. This way, mortgage providers can lend more money to home buyers.
How Does A Home Possible Mortgage Work?
Because Freddie Mac isn’t a lender, you’ll have to apply for a Home Possible loan through a private mortgage lender, just as you would with any other mortgage loan. Quicken Loans is one lender that offers Home Possible mortgages.
To apply, contact a mortgage lender and say you’re interested in a Home Possible mortgage. Your lender will then guide you through the process. You’ll need to provide your lender with proof of your income by sending them copies of your recent paycheck stubs, W-2 forms, tax returns and bank account statements. You’ll also have to give your lender permission to run your credit.
Your lender will review this information to make sure you qualify for a Home Possible mortgage.
Who Qualifies For A Home Possible Mortgage?
Not everyone qualifies for a Home Possible mortgage. That’s because Freddie Mac is targeting low- and very-low-income borrowers for this program.
Income Eligibility Requirements
To be eligible, you can generally earn no more than 100% of your geographic area’s annual median income. The easiest way to find out if you meet this income requirement is to enter your ZIP code into Freddie Mac’s Home Possible Eligibility Map. You might live in an area that has higher income limits.
First-Time Home Buyers
The Freddie Mac program is open to but not limited to first-time home buyers. First-time buyers, though, will have to take Freddie Mac-approved home buyer education classes before taking out a Home Possible mortgage. Freddie Mac will consider you a first-time home buyer if you haven’t owned a home in the last 3 years.
Your debt-to-income ratio, or your DTI, is an important number when applying for a mortgage. This number measures how much of your gross monthly income – your income before taxes are taken out – your total monthly debts eat up. The lower this ratio, the better your chances to get approved for a mortgage loan.
To qualify for a Home Possible mortgage, you’ll generally need your total monthly debts, including your new monthly mortgage payment, to equal no more than 45% of your gross monthly income.
If you’re considered a first-time home buyer by Freddie Mac, you’ll have to complete an approved homeownership education program before qualifying for a Home Possible or Home Possible Advantage mortgage.
You can sign up for a home buyer education course provided by a HUD-approved counseling agency, housing finance agencies, community development financial institutions or mortgage insurance companies. The easiest choice, though, might be to take Freddie Mac's online CreditSmart courses.
Freddie Mac's course will provide strategies for managing your money, an overview of why your credit matters, strategies for applying for a mortgage and suggestions on how to avoid foreclosure and default.
What Are The Advantages Of A Home Possible Mortgage?
Low Down Payments
The biggest benefit of the Home Possible and Home Possible Advantage mortgage programs is the low down payment. You only need a down payment of 3% of your home’s purchase price for these loans. That’s lower than the 3.5% down payment you’ll need with an FHA loan (if your FICO credit score is at least 580) or the 5% that you’ll usually need if you apply for conventional mortgages.
Private mortgage insurance, or PMI, can add $1,000 or more to the yearly cost of your mortgage loan. This insurance is charged by mortgage lenders to protect them in case you default on your mortgage payments. How much you’ll pay in PMI varies, but you can expect to pay anywhere from 0.5% – 1.5% of your mortgage each year for this loan. If your mortgage is $200,000 and your PMI is 0.5% of that, you can expect to pay $1,000 a year for private mortgage insurance.
The Home Possible mortgage requires borrowers to take out mortgage insurance if they’re providing a down payment lower than 20% of their home’s purchase price. With a Home Possible loan, you can cancel mortgage insurance after the balance of your loan drops below 80% of your home's appraised value. This isn’t much different from what happens with conventional mortgages: You can also cancel PMI when your loan balance falls below 80% of your home’s appraised value with a conventional mortgage.
The biggest difference comes with FHA loans. If you take out an FHA loan, you'll have to pay a different version of mortgage insurance, what is known as a mortgage insurance premium or MIP. Borrowers must pay an upfront MIP at closing that is equal to 1.75% of their total loan amount. They also must pay an annual MIP each year that ranges from 0.45% to 1.05% of their loan amount, depending on how much they borrow, how much of a down payment they came up with and their loan's term. The biggest problem with the annual MIP is that most borrowers can’t get rid of it unless they refinance out of an FHA loan.
No Funding Fees
VA loans, loans insured by the U.S. Department of Veterans Affairs, are a good option for military members and veterans because they require no down payment. They do, though, require funding fees, special origination fees that are charged with each VA loan. That fee is 2.3% of your mortgage amount if you are a first-time VA borrower with a down payment of less than 5% of your home's purchase price and 3.6% if you are borrowing a VA loan for a second time and your down payment is less than 5%. The fee is 1.65% of your home price if you are a borrower with a down payment of more than 5% of your home's price and 1.4% if your down payment is 10% or more of your home's final sales price.
What Are The Disadvantages Of A Home Possible Mortgage?
Home Possible loans are not open to all borrowers. Your annual income can't be higher than 100% of the area median income in most areas of the country.
Stricter Lending Requirements
You'll need a FICO® credit score of 660 or higher to qualify for a Home Possible loan, according to Freddie Mac's guidelines. That's stricter than what you'd need with an FHA loan or VA loan, where you can qualify for a 3.5% down payment loan with a credit score as low as 580 or a 10% down payment loan with a FICO® score of at least 500. Quicken Loans requires a minimum 580 credit score for FHA and VA loans.
Fannie Mae offers its own low down payment program, the HomePath Ready Buyer program. To qualify for this program, though, you'll typically need a minimum FICO® credit score of 620.
Home Possible Might Help You Get Your First Home
If you’re looking for your first home, the Home Possible mortgage might be the right choice. This is an especially enticing program for borrowers with cash flow issues. That 3% minimum down payment makes coming up with these funds an easier task.
If you want to learn more about Home Possible financing, chat online or contact a Home Loan Expert with Quicken Loans.