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HomeReady Mortgage Guide
Fannie Mae offers the HomeReady Mortgage Program to help home buyers with limited resources and alternate sources of income afford mortgages. In short, Fannie Mae is a government-sponsored enterprise that develops mortgage programs and provides capital to lenders. Fannie Mae's mortgage programs are offered through approved lenders. The HomeReady Program replaced Fannie Mae’s MyCommunityMortgage Program and is designed to address the growth in the number of households with “extended-family” living arrangements such as cases where parents live with an adult child who wants to buy a home.
The HomeReady 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 contribution. The program is similar to Fannie Mae's 97% LTV Mortgage Program but allows a borrower to include non-traditional sources of income which improves the borrower’s ability to qualify for the mortgage or enables the borrower to qualify for a higher mortgage amount. Typically when you apply for a mortgage only the borrower’s income is considered to determine your ability to qualify for a mortgage but with the HomeReady Mortgage Program three additional sources of income are factored into the qualification assessment:
- Income from non-occupant borrower. This is income from a parent or relative who is a borrower on the mortgage but does reside in the property. For example, a mother’s income could help a daughter qualify for a mortgage to buy a property that only the daughter will own and live in. Both the mother’s and daughter’s income are included in determining the borrower’s ability to qualify for the mortgage and both are listed as borrowers on the mortgage. Income from a non-occupant borrower is considered qualifying income and is subject to income limits outlined below. Please note that if you use income from a non-occupant borrower to qualify for a HomeReady mortgage you are required to make a down payment of at least 5%, which means your maximum loan-to-value (LTV) ratio is 95%.
- Income from boarders. Up to 30% of the income used to determine a borrower’s ability to qualify for the mortgage can come from boarders. For example, if you rent out your basement or a spare room, this rental income can be added to your personal income to determine what size mortgage you qualify for. Please note that to include boarder income in your application you are required to document that you have lived with the person making the rent payments for at least the past year and that you have personally received at least nine payments over the past twelve months (and ideally every month). So if you have not previously receive boarder payments you cannot buy a home and rent out a room and use that income to qualify for a HomeReady mortgage. Additionally, the person paying rent cannot be an applicant on the loan or hold an ownership stake the property.
- Income from non-borrower household member. This is income from a relative who resides in the property but who is not listed on the mortgage. In this case, the income is used to support the borrower's application. For example, if a father lives with his son, the father’s income may be considered by the lender and used to solidify the son's loan application. Please note that income from a non-borrower household member is not added to the applicant's income to determine the applicant's ability to qualify for the mortgage and only the applicant is listed as the borrower on the mortgage. Additionally, the non-borrower household income is not counted against the income limits outlined below.
The HomeReady program also has more flexible borrower qualification requirements especially as it relates to a borrower's credit profile. For example, a borrower with a credit score as low as 620 or with no or limited traditional credit history may be eligible for the program. We discuss qualification guidelines including credit profile guidelines in detail below.
Although Fannie Mae develops and sponsors the HomeReady Program, borrowers do not interact with Fannie Mae when they apply for a HomeReady mortgage. Instead, borrowers apply for the HomeReady Program through approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. These approved lenders make sure that applicants meet the HomeReady Program eligibility guidelines and qualify for the mortgage according to Fannie Mae's borrower qualification requirements. Not all lenders offer HomeReady mortgages but many do.
Contact multiple lenders listed in the table below to understand if they offer HomeReady loans and other low down payment programs. Shopping multiple lenders also enables you to find the best loan terms including the lowest mortgage rate and closing fees.
Borrowers can also combine a HomeReady mortgage with a personal gift, employer program, down payment grant, closing cost assistance program or qualified subordinated second mortgage to pay for a down payment, closing costs or property renovations, allowing the borrower to purchase a one unit property with no personal financial contribution. Down payment and closing cost assistance grants as well as qualified subordinated second mortgages, also referred to as Community Seconds loans, are provided through state or local housing agencies or commissions.
- Review information on Community Seconds and other mortgage assistance programs STATE PROGRAMS
To qualify for the Fannie Mae HomeReady Mortgage Program borrowers must meet certain eligibility requirements. We review the key borrower qualification requirements below.
Down Payment
For a single unit property such as a home, condominium, co-op or townhouse, you are required to make a down payment of at least 3% of the property purchase price. For a two unit property you are required to make a down payment of 15% and for a three or four unit property you are required to make a minimum down payment of 25%. Please note that according to HomeReady guidelines, the rental income from a multi-unit property may be used to help you qualify for the mortgage.
Borrower Personal Financial Contribution
For single unit properties such as a home or condominium, the borrower is not required to contribute any personal funds toward the property purchase to qualify for the HomeReady Program. In this case, instead of using their own funds, the borrower can use a down payment grant, community seconds loan, closing cost assistance program or a gift to pay for the required 3% down payment and closing costs. This enables the borrower to buy the property with no out of pocket costs. 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 personal financial contribution toward the purchase price.
Credit Score
For borrowers with traditional credit profiles, the HomeReady program typically requires a minimum credit score of 620 although lower scores may be permitted if borrowers experienced an extenuating circumstance such as a job loss or illness that adversely impacted their income for an extended period of time. We recommend that you review your credit report and score six months to a year before you start the mortgage process to avoid negative surprises and address potential issues you identify with your credit profile.
For borrowers with limited or no credit history, a lender may submit a non-traditional credit profile on behalf of the borrower. Instead of, or in addition to, using a traditional credit report and score, the lender establishes a non-traditional credit profile using the borrower's payment history for housing (rent payments), utilities and other credit sources. Borrowers that use a non-traditional credit profile to apply for the HomeReady program must have no housing / rental payment delinquencies within the past two years, no outstanding judgments and limited monthly debt among other requirements.
It is important to highlight that in order to qualify for the 3% down payment program option, borrowers typically are required to have a minimum credit score of 680 - 700, depending on their debt-to-income ratio. Borrowers with credit scores from 620 - 680 can qualify for the HomeReady program but are required to make higher down payments.
Borrower Debt-to-Income Ratio
According to HomeReady program guidelines lenders typically apply a debt-to-income ratio of 43% - 45% to determine what size mortgage a borrower can afford, although a ratio of up to 50% may be permitted in certain circumstance. 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 debt-to-income ratio used by the HomeReady Mortgage Program is consistent with the debt-to-income ratio for standard mortgage programs although the FHA Mortgage Program permits a debt-to-income ratio higher than 50% under certain circumstances.
Circumstances under which lenders may apply a higher deb-to-income ratio for HomeReady applicant include if you use income from a non-borrower member, such as a relative, to help qualify for the program or if you have additional sources of income that are not reflected in your application. Using a higher debt-to-income ratio increases what size mortgage you qualify for using the program.
HomeReady Income Limits
HomeReady applicants are subject to income limits. In short, if you make too much money, you may not qualify for the program. As of July 20, 2019, to be eligible for a HomeReady mortgage, you cannot earn more than 80% of the area median income (AMI) where the property is located. For example, if the area median income for the census tract where your property is located is $50,000, the applicants cannot earn more than $40,000 in combined monthly gross income ($50,000 (AMI) * 80% = $40,000 (income limit for that area)). You can review the income eligibility map available on Fannie Mae’s website to determine the area median income (AMI) and applicable HomeReady income limit for any property.
Home Buyer Counseling Class
At least one of the borrowers must complete Framework, an online home buyer education class approved by Fannie Mae, or attend an in-person class offered by a HUD-approved counseling agency. Borrowers also have access to post-purchase counseling and support for the life of their mortgage through Framework’s advisor service.
First-Time and Repeat Home Buyers
The HomeReady Mortgage program is available to both first-time home buyers and borrowers who have previously purchased a home. The borrower that owns and occupies the home can own one other property in addition to the property being financed.
Borrower Financial Reserves
Depending on your credit score, debt-to-income ratio, LTV ratio, mortgage program, the number of units in the property and other factors the HomeReady Program may require that borrowers keep a certain level of savings in reserve at the time the mortgage closes. For example, a borrower with a fixed rate mortgage, 680 credit score, higher debt-to-income ratio and an LTV ratio greater than 75% who is buying a single-unit residence is required to hold two months of mortgage payments as savings in reserve at mortgage closing. So if your monthly mortgage payment is $2,000, you would be required to keep at least $4,000 in reserve at the time the mortgage closes. A borrower with a fixed rate mortgage, 700 credit score, lower debt-to-income ratio and an LTV ratio greater than 75% who is buying a single-unit residence is required to hold no savings in reserve (although FREEandCLEAR recommends that you keep enough savings in reserve to cover three-to-six months of total monthly housing expense).
Because there are so many inputs that determine if you need to hold reserves and how much, we recommend that you check with your lender when you apply for the program to understand how the HomeReady reserve requirements apply to you as you may need additional funds to qualify for your mortgage.
Our easy-to-use mortgage quote form enables you to compare free, no obligation loan quotes from leading lenders. Our quote feature requires minimal personal information and does not impact your credit. Comparing multiple loan proposals is the best way to save money on your mortgage.
Mortgage Rate
The interest rate you pay on a HomeReady mortgage depends on several factors including your credit score and loan-to-value (LTV) ratio. Borrowers with a credit score of 680 and above receive the program’s best interest rate while borrowers with lower credit scores and higher LTV ratios pay higher interest rates, which is a drawback to the HomeReady program. For borrowers with good credit scores, the interest rate for a HomeReady mortgage 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 HomeReady mortgage with the lowest rate and fees.
Private Mortgage Insurance (PMI)
The HomeReady 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 borrower’s credit score and the size of the down payment the borrower makes, with the larger the down payment, the lower the required PMI. The borrower may be able to include the PMI in the mortgage amount as long as the combined loan-to-value (CLTV) ratio does not exceed 97% for a fixed rate mortgage or 90% for an adjustable rate mortgage (ARM).
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 HomeReady Mortgage 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 78%. Additionally, for mortgages with a loan-to-value (LTV) ratio between 90.01% and 97.00%, the cost for PMI required by the HomeReady program is usually less than for standard mortgage programs or the FHA mortgage program, depending on your credit score.
Extra Fees
Borrowers are required to pay standard lender fees and closing costs with the HomeReady Mortgage 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 or closing cost assistance program may be required to pay a separate fee to the housing agency or commission to apply for that program.
Impound Account
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 in your state that offer HomeReady mortgages and other low down payment programs.
Mortgage Program
Only selected mortgage programs are eligible for the HomeReady program. 10, 15, 20 and 30 year fixed rate mortgages plus 5/1, 7/1 and 10/1 adjustable rate mortgages (ARMs) are eligible for the program while interest only mortgages are not eligible.
Maximum Loan-to-Value (LTV) Ratio
HomeReady program loan-to-value (LTV) ratio limits vary depending on the number of units in the property as well as the mortgage program. LTV ratio is the ratio of the mortgage amount to the value of the property. For example if the mortgage amount is $97,000 and the property value is $100,000 then the LTV ratio is 97% ($97,000 / $1000,000 = 97%). The table below outlines the LTV limits for the HomeReady program based on the number of units in the property and mortgage type.
For borrowers combining a HomeReady loan with a Community Seconds loan, the combined loan-to-value (CLTV) ratio of the first mortgage plus the second mortgage can be up to 105%. CLTV 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 HomeReady mortgage plus a Community Seconds 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 closing costs or renovations.
Loan Limit
The HomeReady program only applies to conforming loan amounts ($726,200 or below for a single unit property in most counties) which limits the size of mortgage you can obtain.
Mortgage Type
The HomeReady Mortgage Program applies to both 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. Fannie Mae also offers the High LTV Refinance Option for borrowers who are underwater on their mortgage.
The HomeReady Mortgage Program only applies to owner occupied properties. You can use the HomeReady program to purchase properties with up to four units (for example, an apartment building with four units), but at least one of the units needs to be owner occupied, or lived in by the individual(s) who obtained the mortgage to purchase the property. Investment properties as well as second and vacation homes are not eligible for the program.
Related FREEandCLEAR Resources
- Comparison of Low / No Down Payment Mortgage Programs
- HomeReady and FHA Mortgage Program Comparison
- HomeReady Mortgage Program Pros and Cons
Sources
"HomeReady Mortgage Product Matrix." Mortgage Products. Fannie Mae, December 7 2019. Web.
"HomeReady Income Limits." Lender Letter LL-2019-06. Fannie Mae, June 5 2019. Web.
"B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, July 3 2019. Web.
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