HomeReady Mortgage Pros and Cons
The HomeReady program is offered by Fannie Mae through participating lenders. In short, Fannie Mae is a government-sponsored enterprise that develops mortgage programs and provides capital to lenders. From the borrower’s standpoint, the involvement of Fannie Mae is less important because you interact with the lender, not Fannie Mae, when you apply for a HomeReady mortgage.
Key benefits of the program include a low down payment requirement and the ability to use alternate income sources to qualify for the mortgage or afford a larger loan. Potential drawbacks include a higher interest rate as well as borrower income and loan limits.
Borrowers should understand both the positives and negatives of a HomeReady mortgage to determine if it is the right program for them. We review the full list of the pros and cons for the HomeReady Mortgage Program below.
HomeReady Mortgage Pros
Low Down Payment
The HomeReady Mortgage Program enables you to buy a home with a down payment as low as 3% of the property purchase price. Additionally, the HomeReady program can be combined with a gift, down payment grant or closing cost assistance program to allow you to buy a home with minimal personal financial contribution. By providing the opportunity to buy a home with little or no down payment, the HomeReady mortgage program makes home ownership more attainable.
Ability to Use Additional Sources of Income to Qualify
The HomeReady program enables applicants to use non-traditional sources of income to qualify for the program. When you apply for a mortgage usually only the borrower's income is used to qualify for a mortgage but with a HomeReady mortgage alternate sources of income can be factored into the qualification decision. Income from non-occupant borrowers (such as parents), non-borrower household members (such as relatives that live with you ) and boarders can be factored into your loan application to help you qualify for the mortgage or afford a larger loan amount. For example, a father's income could help a son qualify for a mortgage to buy a home that only the son owns and lives in. In that scenario both the father and son are co-borrowers on the mortgage. Alternatively, if you buy a home that your relatives also live in, the income from those relatives can be used to qualify for a larger mortgage amount although the relatives will not own the home or be listed on the mortgage. Additionally, if you rent out a room in a home, that boarder income can be used on your mortgage application. In sum, the ability to use alternate sources of income with the HomeReady Mortgage Program improves your ability to qualify for a loan and potentially enables you to buy a nicer home.
%
More Flexible Borrower Qualification Requirements
The HomeReady Mortgage Program applies more flexible borrower qualification requirements than other low or no down payment mortgage programs. For example, the program only requires a minimum borrower credit score of 620 and lower score may be permitted under special circumstances. The program also permits the use of non-traditional credit profiles for borrowers with no credit scores or a limited credit history. Additionally, the HomeReady program uses a borrower debt-to-income ratio of 50%, which higher than the 43% to 45% debt-to-income ratio used by many other no or low down payment mortgage programs. Using a higher debt-to-income ratio enables the applicant to qualify for a larger mortgage amount and buy more home.
No Upfront Mortgage Insurance Cost and Lower Monthly PMI Cost
Unlike government-backed low or no down payment mortgage programs such as the FHA, VA and USDA programs, the HomeReady program does not require borrowers to pay an up-front mortgage insurance fee. Eliminating the up-front mortgage insurance fee potentially removes thousands of dollars in closing costs, making it more affordable to buy a home. In addition to not requiring an upfront mortgage insurance fee, the ongoing monthly private mortgage insurance (PMI) cost for a HomeReady mortgage may be lower than the monthly PMI fee for a standard mortgage or the mortgage insurance premium (MIP) for an FHA loan, depending on your credit score and loan-to-value (LTV) ratio. Additionally, PMI is removed when your LTV ratio falls below 78% whereas borrowers are required to pay FHA MIP over the entirety of their mortgage.
HomeReady Mortgage Cons
Higher Interest Rate
The interest rate for a HomeReady mortgage is usually .125% - .500% higher than the interest rate on an FHA mortgage or other conventional mortgage program. Additionally, borrowers with lower credit scores and higher debt-to-income ratios usually pay higher interest rates with the program. The HomeReady program is offered by traditional lenders such as banks, mortgage brokers, mortgage banks and credit unions so borrowers should compare proposals from multiple lenders to find the loan with the lowest interest rate and fees.
Borrower Income Limit
To be eligible for the HomeReady Mortgage Program, you can earn a maximum of 80% of the area median income (AMI) where the property is located. For example, if the area median income where the property is located is $75,000, the applicants' combined monthly gross income cannot exceed $60,000 ($75,000 (AMI) * 80% (income limit) = $60,000). You can use Fannie Mae's property lookup tool to determine the AMI for any home. Borrower income limits reduce the number of people who can use the HomeReady program although a majority of borrowers remain eligible.
Loan Limits
The HomeReady program limits the size of loan you can obtain through the program. The HomeReady Program uses the conforming loan limit, which is $726,200 for a single unit property in the contiguous United States. In Alaska and Hawaii the conforming loan limit is $1,089,300 for a single unit property. People who live in more expensive areas of the country may find that the HomeReady loan limits reduce their housing options. The loan limits are less of a factor for home buyers interested in more affordable homes.
More FREEandCLEAR Resources
HomeReady Mortgage Guide
Review our comprehensive overview of the HomeReady Mortgage Program including program eligibility, borrower income sources, qualification requirements and other important program information.
Mortgage Rates
HomeReady mortgages are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our mortgage rate tables to contact lenders in your area to determine if they offer the HomeReady program and to view updated interest rates and fees. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Comparison of Low or No Down Payment Mortgage Programs
Review and compare multiple conventional and government-backed no or low down payment mortgage programs to understand key program benefits and eligibility requirements.
Sources
"HomeReady Mortgage." Mortgage Products. Fannie Mae, 2020. Web.