What Is a HomeReady Mortgage?
If you are a low-to-moderate income borrower with good credit seeking a new home, it may be worth looking into the HomeReady mortgage sponsored by Fannie Mae. This mortgage, similar to the Home Possible program offered by Freddie Mac, allows for a 3% down payment versus the standard 20% one. The pricing provided on a HomeReady mortgage is better than or equal to standard pricing on a mortgage.
- HomeReady is a Fannie Mae program for low-income borrowers.
- It offers low down payments, low financing costs, and low mortgage insurance costs.
- Borrowers have flexibility in obtaining the funds for down payments.
- A broadly similar program from Freddie Mac is called Home Possible.
- Eligible borrowers only need a 620 credit score to qualify, although scores of 680 or higher will earn them better price options.
- Down payment amounts are 3%, much lower than most mortgages.
How HomeReady Mortgages Work
The HomeReady program is open to first-time and repeat homebuyers, plus those seeking to refinance an existing mortgage. Eligible borrowers need to have credit scores of 620 or greater, and those with scores of 680 or more may receive even better pricing. HomeReady also offers affordable mortgage insurance coverage.
Eligible borrowers are those whose income is 80% or less of the area median income (AMI) for the census tract in which the property is located, as of July 20, 2019. This condition includes properties in low-income census tracts. A borrower under the HomeReady program may also have ownership interests in other residential properties. Still, only one of those other properties may be financed when closing on a HomeReady mortgage.
Community Seconds are second mortgages that are used to fund down payments and closing costs on first mortgages that are delivered to Fannie Mae.
Benefits of a HomeReady Mortgage
In addition to a low down payment of 3%, HomeReady mortgages offer better than or equal to standard loan pricing. The program also offers lower than standard mortgage insurance coverage requirements when the loan-to-value (LTV) ratio is between 90% and 97%, plus the ability for the borrower to cancel monthly mortgage insurance payments when the LTV ratio drops below 80%. Additionally, the borrower is not required to use a minimum amount of personal funds for the down payment and closing costs but instead may tap other sources such as gifts, grants, and Community Seconds mortgages.
Another significant benefit of the HomeReady mortgage is the flexibility of its terms. While income limits may apply for all borrowers, a HomeReady mortgage doesn't have to be solely in the name of those who occupy the dwelling. Parents and other family members may be co-borrowers, even if they don't plan on living in the home. If a family plans to purchase a home with an attached rental unit, they can use the potential rental income as an equation in their eligibility to boost their qualification for the mortgage.
Criticism of a HomeReady Mortgage
While HomeReady mortgages have multiple benefits, there are a few drawbacks. When you purchase a home using HomeReady, you will have limits on the amount you can borrow. This program (via Fannie Mae) uses FHFA'ss conforming loan limit, which as of 2022, is $647,200 for a single unit property in the contiguous United States. If you buy a property in Hawaii, Alaska, Guam, or the U.S. Virgin Islands, the amount jumps to $970,800. The challenge of the conforming loan limit is that in some parts of the U.S., especially on the coasts, housing prices, even for affordable homes, are much higher than the conforming limit as set by the FHFA.
However, it is worth noting that in some areas where 115% of the median home value exceeds the conforming loan limit, it will be higher than the baseline limit. The loan ceiling in these areas for one-unit properties in high-cost areas rises to $970,800. However, just because you can borrow this amount, if you are living on a low-to-moderate income, it may be risky to take out a loan that you may not be able to afford even if you do qualify for it on paper.
There are also benefits for lenders who participate in HomeReady mortgages. For example, Fannie Mae's Desktop Underwriter (DU) system automatically identifies loans that may be eligible for HomeReady, while offering a credit risk assessment.
Lenders can also receive risk-based pricing waivers for borrowers with credit scores of 680 or greater and LTV ratios over 80%. HomeReady loans can also be combined with standard loans in mortgage-backed security (MBS) pools and whole loan commitments.