Home Possible Mortgage Guide
- How the Home Possible Mortgage Program Works
- Important Home Possible Mortgage Program Considerations
- Ability to purchase a home with low down payment and no borrower financial contribution
- Ability to include rental income from boarders and other units in multi-unit property to qualify for a mortgage
- Potentially reduced interest rate for borrowers with low incomes or for properties located in designated areas
- Opportunity to use sweat equity to pay for your down payment and closing costs
- No up-front FHA mortgage insurance premium (MIP) and potentially lower ongoing private mortgage insurance (PMI) cost as compared to the ongoing FHA MIP cost
- The borrower is not required to maintain reserves if buying a single-family property
- Typically higher interest rate than other government-backed low / no down payment mortgage programs, depending on borrower income and where the property is located
- Requires borrower to pay ongoing Private Mortgage Insurance (PMI)
- The borrower is subject to maximum income limits
- Limits on mortgage amount
- How to Apply for the Home Possible Mortgage Program
- Review information on Affordable Seconds and other mortgage assistance programs STATE PROGRAMS
- Home Possible Program Qualification Requirements
- Program Costs and Fees
- Mortgage Type and Loan Amount
- Property Eligibility
Freddie Mac offers the Home Possible Mortgage Program to help home buyers with limited resources afford mortgages. The Home Possible program enables home buyers to buy a home with a down payment as low as 3.0% of the property purchase price and no minimum borrower financial contribution. The Home Possible program is similar to Fannie Mae’s HomeReady Mortgage Program.
Typically when you apply for a mortgage only the borrower’s wage income is considered to determine your ability to qualify for a mortgage but with the Home Possible Mortgage Program rental income is also factored into the qualification assessment. For example if you purchase a single family property and rent out a room, the rental income could help you to qualify for the mortgage. Additionally, if you purchase a multi-unit property, the rental income from the units you do not live in could help you qualify for the mortgage.
Please note that to use rental income to qualify for the mortgage on a single unit property you must verify that you received rental payments for at least nine months over the past year. If you have not received regular rental payments in the past you may not be able to use rental income that you expect to receive in the future to qualify for the Home Possible program if you want to be a one unit residence such as a home, condominium or coop.
The Home Possible Program also allows you to use a non-occupant co-borrower to qualify for the mortgage on a single family property. For example, one of your parents can be a co-borrower on your mortgage even if they do not live in the property with you. In this case, their monthly income and debt expense are included in your mortgage application. If he or she has solid income and relatively low debt, having a relative as a co-borrower can enhance your loan application and improve your ability to get approved for the loan.
Although Freddie Mac develops and sponsors the Home Possible Mortgage Program, borrowers do not interact with Freddie Mac when they apply for a Home Possible loan. Instead, borrowers apply for the Home Possible Program through approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. These approved lenders make sure that applicants meet the Home Possible Program eligibility guidelines and qualify for the mortgage according to Freddie Mac's borrower qualification requirements.
We recommend that you compare the loan terms for a Home Possible mortgage to other low down payment programs. Use the table below to compare mortgage rates and fees and contact multiple lenders to understand the home buyer assistance programs they offer. Comparing lenders and loan programs enables you to find the loan that is right for you.
Borrowers can also combine a Home Possible loan with a personal gift, employer program, down payment grant, closing cost assistance program, qualified subordinated second mortgage or sweat equity to pay for a down payment, closing costs or property renovations, allowing the borrower to purchase a property with no personal financial contribution. Down payment and closing cost assistance grants as well as qualified subordinated second mortgages, also referred to as Affordable Second mortgages, are provided through state or local housing agencies or commissions.
Borrowers must meet certain eligibility requirements to qualify for the program. We review the key Home Possible Program qualification requirements below.
Borrower Financial Contribution
For single unit properties such as a condominium or home, applicants are not required to contribute any personal funds toward the property purchase to qualify for the Home Possible Program. In this scenario, instead of using your own funds, you can use an affordable seconds loan, down payment or closing cost assistance grant or a gift to pay the required down payment and closing costs. This enables the borrower to buy the property using no out of pocket funds, which makes buying a home more attainable. For two-to-four unit properties, the borrower is required to contribute at least 3% of the property purchase from their own funds if the loan-to-value (LTV) ratio is greater than 80%. If the LTV ratio is less than or equal to 80%, the borrower is not required to make a financial contribution to buy the property.
Home Possible guidelines also enable you to use sweat equity -- which is the value of any repairs or improvements you make to the property using your own labor and materials you purchase -- to pay for your down payment and closing costs. The ability to use sweat equity for a down payment is relatively unique to the Home Possible Program and is especially helpful for properties that need renovations or upgrades. Using sweat equity for your down payment involves extra work and documentation by both your lender and the property appraiser so be sure to understand the additional eligibility requirements.
The Home Possible program typically requires a minimum credit score of 660 for the purchase of single-family residences with a fixed rate mortgage. The minimum credit score required for an adjustable rate mortgage (ARM) or refinancing is 680. The minimum credit score required for a multi-unit property is 700. We recommend that you review your credit score six months to a year before you start the mortgage process to address potential issues.
The Home Possible program also permits borrowers with a limited credit history or no credit score to qualify for the program but this process is relatively strict and requires extra work by both the applicant and the lender. In this scenario the lender provides a non-traditional credit profile using the borrower's payment history for their rent as well as for other recurring monthly accounts such as a cell phone or utility bill. Please note that not all borrowers with limited or no credit profiles are eligible for the Home Possible program.
Borrower Debt-to-Income Ratio
The Home Possible program gives lenders discretion on what debt-to-income ratio to apply in determining what size mortgage a borrower can afford. In short, a debt-to-income ratio represents the ratio of how much you spend on monthly debt payments such as your mortgage and credit card bills to your monthly gross income. The higher the debt-to-income ratio used by the lender, the larger the mortgage you can afford. Under the Home Possible program guidelines, a lender may use a higher debt-to-income ratio for a borrower with a strong credit profile, extended employment history and significant savings while a lender may use a lower debt-to-income ratio for a borrower with a lower credit score, shorter employment history and limited savings. Although the program has no set figure, most lenders use a debt-to-income ratio of 43% - 45% for program applicants.
Please note that if you are applying for the mortgage with a non-occupant co-borrower, the maximum debt-to-income ratio for the occupying borrower (the person who is going to live in the property) is 43% although the debt-to-income ratio factoring in the non-occupant co-borrower (the person who is not going to be living in the property) may be higher, which enables you to afford a higher loan amount.
Home Possible Borrower Income Limits
Home Possible borrowers may be subject to income limits depending on the location of the property they are financing. Unless the borrower is purchasing a property located in a designated low income census tract, a borrower’s annual gross income cannot exceed 100% of the area median income (AMI). Income limits do not apply to borrowers that purchase a property in a low income census tract. Areas are designated as low income census tracts according to Freddie Mac and government guidelines. Freddie Mac’s Affordable Income and Property Eligibility Tool enables you to determine the AMI and borrower income limit for an area based on property location.
Home Buyer Education Class
First-time home buyers are required to take a Freddie Mac-approved homeownership education class and purchasers of multi-unit properties are required to take a Freddie Mac-approved landlord education class.
First-Time and Repeat Home Buyers
The program is available to both first-time home buyers and borrowers who have previously owned a home. Additionally, Home Possible program applicants are also allowed to own other properties.
Borrower Financial Reserves
The Home Possible program does not require borrowers to hold savings in reserve at mortgage closing for purchases of single family properties, although FREEandCLEAR recommends that you keep enough savings in reserve to cover three-to-six months of total monthly housing expense. For purchases of multi-family properties borrowers are required to hold two months of mortgage payments as savings in reserve at mortgage closing, although the requirement may be higher in some cases. So if your monthly mortgage payment is $2,000, you would be required to hold at least $4,000 in reserve at the time the mortgage closes.
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The mortgage rate you pay on a Home Possible loan depends on several factors including your credit score and loan-to-value (LTV) ratio. Borrowers with a credit score of 720 and above receive the program’s best rate while borrowers with lower credit scores and higher LTV ratios pay higher interest rates, which is a negative of the Home Possible Program. For borrowers with good credit scores, the mortgage rate for a Home Possible loan is similar to other conventional no and low down payment programs but higher than the interest rate for government-backed programs such as the FHA, VA and USDA mortgage programs. Borrowers should shop multiple lenders to find the Home Possible mortgage with the best terms.
One unique element of the Home Possible program is that Freddie Mac caps the delivery fees it charges to lenders for borrowers with certain income levels or for properties located in designated areas. In short, capping delivery fees means that eligible borrowers should pay a lower interest rate. The delivery fee cap applies when a borrower’s income is less than 80% of the area median income (AMI) or if the property is located in a low income census tract. You can use Freddie Mac’s Affordable Income and Property Eligibility Tool to determine if you are eligible for the lower interest rate based on your income level and property location.
Private Mortgage Insurance (PMI)
The Home Possible Mortgage Program requires that borrowers purchase private mortgage insurance (PMI), which is an ongoing monthly cost in addition to your monthly mortgage payment. In short, PMI protects the lender in the event that the borrower defaults on the mortgage. The amount of PMI the borrower is required to pay depends on the LTV ratio, mortgage program and mortgage length, with the lower your LTV ratio, the lower the required PMI.
Most conventional low down payment programs require borrowers to pay PMI while the FHA and USDA Mortgage programs require the borrower to pay both an up-front and ongoing mortgage insurance premium (MIP). The Home Possible Program does not require borrowers to pay an up-front PMI fee and the monthly PMI fee is removed when your LTV ratio falls below 80%. Additionally, in some cases the required monthly PMI fee for a Home Possible mortgage is lower than the mortgage insurance premium for an FHA mortgage.
Borrowers are required to pay standard lender fees and closing costs with the Home Possible Program. Aside from a small fee to pay for the home buyer education class, borrowers are not required to pay additional fees to apply for the program. Borrowers using a down payment grant or closing cost assistance program may be required to pay a separate fee to the housing agency or commission to apply for that program.
Along with their mortgage payment, the program requires borrowers to pay property tax, homeowners insurance and private mortgage insurance (PMI) into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which expenses such as taxes and insurance are paid when due. The impound account does not affect the amount of fees the borrower is required to pay for the mortgage.
Use the FREEandCLEAR Lender Directory to find leading lenders that offer Home Possible loans and many other low down payment programs
Only selected mortgage programs are eligible for the Home Possible program. Fixed rate mortgages with terms of 30 years or less and 5/1, 5/5, 7/1 and 10/1 adjustable rate mortgages (ARMs) are eligible for the purchase one and two unit residences. Please note that the 3% down payment option only allows fixed rate mortgages. ARMs are permitted to finance three and four unit properties as long as the LTV ratio does not exceed 75%. Interest only mortgages are not allowed according to program guidelines.
Maximum Loan-to-Value (LTV) Ratio
Home Possible program loan-to-value (LTV) ratio limits vary depending on the number of units in the property and other factors. For a single unit property the maximum LTV ratio is 97% (or 95% if you are using a non-occupant co-borrower) and the maximum total loan- to-value (TLTV) ratio if the borrower uses an Affordable Second mortgage is 105%. For a multi-unit property the maximum LTV and TLTV ratios are both 95%.
TLTV ratio equals the sum of the amounts of all the mortgages on a property divided by the fair market value of the property. For example, if the property purchase price is $100,000 a qualified borrower can obtain a Home Possible mortgage plus an Affordable Second mortgage for a total loan amount of $105,000. The borrower can use $100,000 from the two mortgages to purchase the property and $5,000 to pay for the down payment and closing costs. In this example the TLTV ratio = 105% ($105,000 (total mortgage amount) / $100,000 (property value) = 105%).
The program applies conforming loan limits which caps the size of mortgage you can obtain. It is important to highlight that the Home Possible Program permits the use of super conforming loan limits which are higher limits in counties with more expensive housing costs. Depending on the county, the conforming loan limit for a single family property ranges from $484,350 to $726,525 while the limit for a four unit property ranges from $931,600 to $1,397,400. Allowing borrowers to use the super conforming loan limit enables you to qualify for a higher mortgage amount and buy more home which is helpful in higher cost areas.
The Home Possible program applies to home purchase mortgages as well as refinancings. The program helps borrowers who have limited equity in their property refinance their loan into a new, potentially more affordable mortgage. Cash-out refinancings are not allowed under the program.
The Home Possible Mortgage Program only applies to owner occupied properties. You can use the Home Possible program to purchase properties with up to four units, but at least one of the units needs to be owner occupied (lived in by the individual(s) who obtained the mortgage to purchase the property). The 3% down payment option only applies single unit residences. Investment properties as well as second and vacation homes are not eligible for the program.
Related FREEandCLEAR Resources
Home Possible Program Guidelines: http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1813.pdf