What Is The HomeReady Program And How Do You Qualify For It?
One of the biggest reasons people delay homeownership is because they don’t have enough money saved to make the minimum down payment. For those finding it difficult to save, Fannie Mae’s HomeReady program makes homeownership more accessible for those who may not otherwise qualify for other types of financing.
However, not everyone is eligible for this type of loan. The HomeReady program is designed to help low- and moderate-income borrowers who meet income and credit requirements. If you’re interested in taking advantage of this program, here are the pros and cons and the steps you’ll need to take to apply for Fannie Mae’s HomeReady.
What Is The HomeReady Program?
The Fannie Mae HomeReady program helps buyers with strong finances and low down payment savings qualify for the financing they need to buy a home. The HomeReady mortgage is available through most conventional mortgage lenders, offering more favorable interest rates and lower mortgage insurance premiums for qualified borrowers.
The HomeReady program requires a minimum down payment of 3% of the purchase price, but flexible funding solutions are available. Funds for your down payment and closing costs can come from multiple sources, including gifts, grants from lenders or other eligible entities and Community Seconds. No minimum personal funds are required.
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How The HomeReady Program Is Different
The HomeReady program was designed to help creditworthy, low-income borrowers.
Unlike many other types of mortgages, this program has a low down payment requirement for purchase and refinance loans with no requirement for using personal funds. This makes it much easier for low- to moderate-income families struggling to save money to become homeowners.
Mortgage lenders also make risk-based price adjustments for HomeReady loans. Standard risk-based pricing is waived for loans with a loan-to-value (LTV) ratio of less than 80% and a credit score of 680 or greater.
There are also income limits to qualify for the program. Lenders must use Fannie Mae’s Area Median Income (AMI) tool to compare the borrower’s income to the median income for the property’s location. The HomeReady program also considers non-borrower income for approval, but it is not required to be included for income limitation purposes.
Another difference is that the HomeReady program has lower mortgage insurance requirements than other mortgages. This increases the likelihood that low-income borrowers will be approved for a home loan and makes monthly mortgage payments more affordable.
Who Qualifies For A HomeReady Loan?
To be eligible for a HomeReady loan, borrowers must meet the following criteria:
- Income requirements: The borrower’s income must be equal to or less than 80% of the county’s area median income. For example, if the AMI in the property’s area is $100,000, then the HomeReady income limit is $80,000. You can use Fannie Mae’s AMI lookup tool to determine the AMI for your address.
- Minimum credit score requirements: At least one borrower on the loan must meet the minimum credit score requirement. HomeReady loans require a credit score of at least 620. You may have the option to use alternative credit data, like payments on rent and utilities, to meet this qualification. Check with your lender for their specific requirements.
- Debt-to-income ratio requirements: A borrower’s debt-to-income (DTI) ratio is factored into their eligibility for loan approval. This is calculated by dividing all monthly debts by gross monthly income. For a HomeReady loan, the DTI can be up to 50%.
HomeReady Guidelines For Properties
The HomeReady loan program can help borrowers purchase different types of properties, not just a single-family house. HomeReady borrowers must follow these guidelines when financing a property:
- The property must be a primary residence. A HomeReady loan may only be used to purchase a primary residence. This excludes a vacation home or rental property if the borrower does not live in one of the units. A primary residence is generally considered your legal address where you spend most of your time.
- The property must be residential, not commercial. The HomeReady program does not finance commercial properties and is intended for low-income borrowers struggling to save for a down payment.
- The property can be a condo, co-op, multifamily home with 4 units or fewer, detached or attached planned unit development (PUD) or manufactured home: These properties can also be new or existing construction. If the LTV ratio, combined LTV ratio, or high credit LTV ratio exceeds 95% for a HomeReady loan, then the property can only be a one-unit principal residence.
The Benefits Of The HomeReady Loan Program
The HomeReady program provides several benefits to eligible borrowers.
Low Down Payment Requirements
The down payment requirement is often lower than those for other conventional mortgages. Borrowers can use their personal savings or cash on hand to fund the down payment but these funds don’t have to come directly from the borrower. Gift money, grants and Community Seconds program funds can be used to pay for down payment and closing costs with no minimum contribution required.
Lower Mortgage Insurance Costs
There’s no upfront mortgage insurance fee, which is required with FHA loans, and ongoing monthly private mortgage insurance (PMI) may be lower than the monthly PMI for a conventional mortgage.
For LTVs between 90% and 97%, HomeReady offers mortgage insurance lower than the standard amount. Standard mortgage insurance coverage is required on HomeReady loans with LTV ratios at or below 90%. For LTVs over 90%, 25% coverage is required. Additionally, PMI is automatically canceled once the LTV ratio falls below 78%.
Flexible Co-Borrower Arrangements
The HomeReady program offers flexible co-borrower arrangements, including non-occupant borrowers. A non-occupant borrower is financially able to be a borrower on the mortgage but will not live in the home. This means that a parent or other family member can be on the mortgage and the lender will use their income and liabilities to determine eligibility for the home loan.
The Disadvantages Of The HomeReady Loan Program
The HomeReady loan has its downsides, and it may not be the best choice for some borrowers.
Potentially Higher Interest Rates
Because of the program’s lenient down payment policy, borrowers could end up paying a higher interest rate than on an FHA loan or other conventional mortgages. Borrowers with lower credit scores and higher DTI ratios typically pay the highest interest rates.
Higher Credit Score Requirements
HomeReady’s minimum 620 credit score requirement is higher than other loans geared toward low- to moderate-income borrowers. For example, borrowers who make a down payment of 10% of the purchase price of the home can qualify for an FHA loan with a credit score between 500 and 579.
Income Limits
The HomeReady program has income limits in place for borrowers. Income limits are based on the area median income of the census tract in which the property is located. The income limit for all HomeReady loans is 80% of the AMI. Borrowers who make more than the income limit each year should consider a different type of home loan.
How To Apply For A HomeReady Loan
If you’re considering a HomeReady loan, here are the general steps to apply.
1. Review Your Finances
Before you apply to any type of home loan, you should look over your finance to ensure you’re ready for homeownership and to confirm the HomeReady program is the right fit for your needs. Check whether your income and credit score meet the program’s requirements. If your credit score is under 620, you may need to take steps to improve your score.
The HomeReady program also considers nontraditional credit. This includes payments toward rent, utilities, medical insurance, car insurance, a phone plan and even payments to local stores.
2. Consider The Requirements
The HomeReady program has unique qualification requirements, including income limits, credit score requirements and homeownership education courses, compared to other types of home loans. Review the requirements before you apply to make sure you qualify for the program.
3. Find A Great Lender
Take your time choosing a lender. Most lenders offer HomeReady loans, so you should consider factors like the quality of their services and the average interest rates offered when making a decision. It’s typically recommended to get a quote from three to five mortgage lenders to compare interest rates and lender fees.
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4. Fill Out An Application
The application for a HomeReady loan is the same as other conventional home loans. When you’re filling out the loan application, you’ll need to answer questions regarding your income, debts, assets, employment and property. Be prepared to provide supplemental documentation to verify your financials with the lender. This can take time if you’re filling out a paper application.
5. Complete The Education Requirements
The HomeReady program requires borrowers to complete a homeownership education course, either online or in a classroom, to purchase a home with a HomeReady loan. This course teaches prospective buyers everything they need to know about the home buying process, like how to save and prepare for a home purchase and work with lenders and real estate professionals, as well as walking you through the mortgage process and much more.
Fannie Mae guidelines say that at least one borrower must complete a homeownership education course from a qualified provider if all borrowers on the loan are first-time buyers. A qualified provider is independent of the lender and supplies homeownership education content that is aligned with National Industry Standards (NIS) or is offered by a housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). Examples of qualified providers include:
- Community Seconds or other down payment assistance program providers
- Mortgage insurance companies
- HUD-approved counseling agencies
- Housing Finance Agencies
- Community Development Financial Institutions
Fannie Mae HomeView can also be used to satisfy homeownership education requirements, which takes about three to four hours to complete. You must score at least an 80% on the final assessment to receive a certificate of completion. The course can be taken as many times as necessary to pass.
One exception is if you’ve completed housing counseling by an agency approved by the U.S. Department of Housing and Urban Development (HUD) and completed Form 1017 or a course completion certificate.
FAQ About The HomeReady Program
Below are the most frequently asked questions about the Fannie Mae HomeReady program.
Do I have to be a first-time home buyer to use a HomeReady loan?
No, first-time home buyers and repeat buyers can use a HomeReady loan. However, repeat buyers cannot qualify and already own a home with this mortgage type.
Can I apply with a co-borrower?
Yes, more than one borrower can apply on the same HomeReady loan application. Not all borrowers are required to live on the property as their primary residence.
Can I use a HomeReady loan to buy a multifamily property?
A HomeReady loan can be used to buy a multifamily property with up to four units. However, you must live in one of the units as your primary residence.
Where can you get the counseling certificate for the HomeReady program?
You can take the homeownership education course through Fannie Mae HomeView to receive the certificate of completion. Other qualified providers, such as a mortgage insurance company or a down payment assistance provider approved by the Department of Housing and Urban Development (HUD), may also provide a certificate upon completion of the course.
Do I apply for a HomeReady loan directly through Fannie Mae?
No, Fannie Mae is a government-sponsored mortgage enterprise, not a mortgage lender. Most mortgage lenders offer HomeReady loans, so you can apply for this type of loan when filling out a mortgage application.
The Bottom Line
The Fannie Mae HomeReady program is a great choice for creditworthy, low-income borrowers who can make the minimum down payment on the loan. Unlike other types of loans, borrowers have no obligation to use their personal funds for the down payment or closing costs. This program works for first-time and repeat buyers, but make sure you qualify for the loan and meet income requirements before filling out an application.
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