What is a HomeReady Mortgage?

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HomeReady mortgages are a line of conventional home loans offered by Fannie Mae that are meant to help low- and moderate-income borrowers buy or refinance. HomeReady loans reduce the typical down payment and mortgage insurance requirements, but they're also more flexible about allowing contributions from other people. This makes HomeReady an ideal choice if you're relying on others to help fund your home purchase.

What Are the Benefits of a HomeReady Mortgage?

Aside from having lower costs, the primary difference between HomeReady mortgages and other conventional home loans is that their flexible approval process allows for co-borrowers as well as contributions from others living in your home.

Advantages of a HomeReady Mortgage

  • Lowers down payment and credit score requirements
  • Allows you to accept larger gifts in down payment and closing
  • Reduces mortgage insurance and allows you to cancel at 80% LTV
  • Permits family or friends to co-sign on your home loan
  • Income from others in your house can help you get approved

Lower Down Payment and Borrower Contribution

Not only do HomeReady mortgages come with lower minimums for down payment, they also let you fund your upfront mortgage costs with more help from other sources. Fannie Mae will allow a loan-to-value ratio (LTV) of up to 97% for a HomeReady loan on single-family units, which translates to down payments of at least 3%. This is actually lower than the minimum down payment for FHA loans, which is usually 3.5% even with a government guarantee to the lender. With HomeReady, you won't have to worry about meeting a minimum for your personal contribution, which means that you can expect to fund your entire mortgage from a gift.

More Affordable Mortgage Insurance Premiums

Compared to programs like FHA loans, HomeReady helps you minimize and eventually eliminate mortgage insurance premiums more swiftly. While FHA borrowers will run into both upfront and monthly premiums, Fannie Mae doesn't include an upfront premium as part the HomeReady closing costs. This means that a HomeReady loan allows you to spend more on your down payment, which in turn increases the amount you can afford to borrow.

HomeReady loans are also more advantageous in terms of their monthly insurance premiums. FHA loans don't allow you to cancel mortgage insurance short of refinancing into a conventional mortgage. In contrast, a HomeReady mortgage will give you the option of eliminating mortgage insurance once you build up enough equity —just like any other conventional mortgage loan. In short, the HomeReady mortgage is a way to access low down payments without sacrificing your ability to reduce mortgage insurance costs.

Flexible Process For Approval

HomeReady mortgages provide the greatest benefit to people who plan to share the costs of the loan with other family members. Most mortgage lenders base their approval process solely on the borrower's personal income. For HomeReady loans, Fannie Mae permits non-occupant co-borrowers to add their financial support to the process. This means that parents or relatives can help boost a borrower's chances of securing approval for a mortgage, even if they don't plan on living in the purchased property.

Even if you don't have any co-borrowers, the HomeReady loan will count the contribution of people living with you as compensating factors. While their incomes won't be added to yours in the approval process, they can help you secure approval in situations where your debt-to-income ratio is higher than normal. This includes not only immediate family members but also roommates and boarders who can prove that they've been with you for at least one year. If your new home has any detached living units like a basement apartment, you can also propose to find a tenant and add the estimated rent as part of your income in the application.

Requirements for a HomeReady Mortgage

While you don't have to be a first-time homebuyer to qualify for a purchase or refinance with HomeReady, there are a variety of other financial requirements you'll need to fulfill.

HomeReady Mortgage Requirements

  • Income less than or equal to the area median income (AMI)
  • Minimum credit score of 620
  • Participation in homeownership education

The AMI of your home address is determined according to US Census tracts, which you can look up on Fannie Mae's HomeReady eligibility page. So long as your personal income isn't higher than the AMI for the address where you want to buy or refinance, you should be able to apply for a HomeReady mortgage. Borrowers in low-income areas may not have to worry about any income limit at all.

However, you'll also need to meet a minimum credit score of 620 and participate in homeownership education courses approved by the program. These aren't particularly difficult hurdles to clear, considering that the minimum credit score for an FHA loan is 580 and most approved courses last between 4 to 6 hours. Still, you should know that you'll need to pay for whichever course you decide on, which will add a little to your final expenses.

Where Can You Find HomeReady Mortgage Lenders?

While Fannie Mae designs and sets the rules for HomeReady mortgages, the loans themselves are provided through national and local mortgage lenders such as banks. While the program is available to any Fannie Mae-approved lender in the US, there's no requirement for every such lender to participate in HomeReady. The easiest way to find a local mortgage lender providing HomeReady mortgages is to work through a mortgage broker, whose job involves connecting borrowers with lenders who carry the products they need. Another popular mortgage program that first-time homebuyers should consider is the Home Possible program offered through Freddie Mac.

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