You dream of owning your own home – but shopping for mortgage loans can make you feel like homeownership is really just a fantasy. When you don’t have the right credit score or the right downpayment to get past a bank’s underwriting team, it can be intensely discouraging.
That’s why products like the Fannie Mae HomeReady® mortgage loan program exist. Through HomeReady®, lots of people are able to buy or refinance a home despite the lack of large financial reserves or non-traditional sources of income to use toward their down payment.
What Is Fannie Mae’s HomeReady® Loan?
The HomeReady® loan program was launched in 2014 as an extension of the Federal National Mortgage Association’s (Fannie Mae’s) ongoing commitment to help create affordable housing and erase barriers to homeownership for hardworking people.
This program aims to expand access to mortgage credit and promote sustainable homeownership by enabling potential buyers from low- to moderate-income households to overcome some of the numerous hurdles associated with down payment and credit requirements. Here are some of the benefits of the program.
Reduced Down Payment Options
One of the most significant barriers to homeownership is the substantial down payment typically required by lenders. The high costs of renting can make it impossible for potential homebuyers to save up “extra” for a down payment, even though a monthly mortgage payment would actually be cheaper.
Recognizing this challenge, the HomeReady® loan program offers reduced down payment options. Borrowers can secure a mortgage with as little as 3% down, which is significantly lower than the conventional 20% down payment demanded by many mortgage lenders. In practical terms, that’s the difference between having to come up with $7,500 or $50,000 for a $250,000 home – which makes it easy to visualize the HomeReady® benefit.
By reducing the upfront cost of homeownership, this feature makes it more possible for folks with limited savings to enter the housing market and begin building true generational wealth.
Flexibility Regarding Sources of Funds
The HomeReady® loan program recognizes that even low down payments and closing costs can still present significant financial obstacles for many potential homeowners. To address this, the program allows borrowers to have flexibility in sourcing their funds.
Borrowers can use things like grants, financial gifts from relatives and loans from employers or nonprofit organizations. Furthermore, eligible borrowers may qualify for down payment assistance programs offered by state and local governments or community organizations.
That means, for example, that your parents can gift you with the down payment for your home through this program without triggering any underwriting alarm bells about your ability to keep up the monthly mortgage payments.
Broader Definition of Countable Income
The HomeReady® loan program stands out for its flexible eligibility criteria, recognizing the diverse nature of modern households. Whether committed partners, a nuclear family unit or an extended household is involved, HomeReady® ensures that aspiring homeowners from various backgrounds can benefit from the program.
Typically, when you apply for a conventional loan, banks only look at the borrower’s income when making their decisions about whether or not to extend credit, and they aren’t always flexible about who can be a “co-borrower.” The HomeReady® Program greatly expands the type of income that can be used to qualify for a mortgage:
Non-occupant co-borrowers can use their income to help qualify for a larger loan. For example, a parent could act as a co-borrower on their child’s home loan and use their income to help their child qualify for a much bigger mortgage than they could on their own.
Non-borrowing co-occupants can use their income to help qualify for a loan. For example, imagine that your mother lives with you and your spouse. Even though you see yourselves as a family unit, your mother’s income couldn’t be used to help qualify for a conventional loan unless she’s going to be on the mortgage. With HomeReady®, it can.
There are other acceptable forms of income that can be factored into loan eligibility as well, so it’s always wisest to get an experienced take from a mortgage professional if you have questions.
More Relaxed Eligibility Requirements
It is true, however, that not everybody qualifies for a HomeReady® loan. In order to qualify you must:
- Have a minimum credit score of 620. It’s important to note that this is far from “perfect” credit and is much lower than most lenders will consider. In addition, you may be able to use alternative credit history (such as utility bill payments) to boost your score.
- Have income either equal to or less than 80% of your county’s area median income (AMI). (There are some exceptions for people living in low-income census areas or “zones” where median household incomes deviate significantly from the average.)
- Take a homeownership education course. These are pre-approved courses (ranging from 4-6 hours total) that are designed to help would-be buyers understand the financial realities of owning a home so that they’re more prepared.
It’s also important to note that HomeReady® loans can be used for refinances, but they don’t allow you to pull out any of the equity, so that makes the program unsuitable if you need to access those funds.
Competitive Mortgage Terms and Lower Costs
Affordability is a key consideration in the HomeReady® loan program, so it offers borrowers competitive mortgage terms, including both fixed-rate and adjustable-rate mortgage options. Closing costs, too, can be significantly reduced when compared to conventional loans.
With attractive interest rates, borrowers can benefit from lower monthly payments compared to traditional mortgage programs. This not only eases the financial burden but also enhances the long-term affordability of homeownership. Plus, the program eliminates the need for private mortgage insurance (PMI) once the loan-to-value ratio reaches that traditional “20% down” threshold.
By eliminating financial barriers and fostering equal access to safe, affordable housing, HomeReady® empowers individuals and promotes thriving communities where homeownership can be a foundation for long-term financial stability and prosperity. If you’re ready to explore your loan options, talk to your local mortgage experts.