Fannie Mae HomeReady

In December of 2015, on a mission to make home buying easier,  Fannie Mae came out with a new lending product called HomeReady.

This program goes way beyond the flexibility of most other loan types, even ones considered ultra-flexible like FHA.

HomeReady is Flexible on Down Payments

​Down payments have been one of the toughest parts of breaking into home ownership.

The HomeReady Mortgage only requires 3% down. But more important, the source of that 3% is very flexible.

Most other mortgage programs require what's called a "minimum contribution" from the borrower. This is the amount home buyers must come up with on their own. Only after they have met the minimum contribution can they receive help from a gift or down payment assistance program.

Not so with HomeReady. One hundred percent of the down payment can come from a down payment gift. A parent or other relative can fund the entire amount of down payment and closing costs.

The buyer can also receive a grant from an approved down payment assistance source. Many cities and states around the country offer down payment assistance programs that cover up to 100% of the required down payment.

Many Income Sources Can Help You Qualify

Another HomeReady flexibility is regarding income.

HomeReady is exactly like other mortgage programs in that borrowers can use employment income, commission, bonus, and even tip income to qualify, however home buyers have the ability to factor in other sources that most other mortgage programs will not allow.

Household Income

Home buyers can use income of household members who will not be on the loan.

This feature works great for multiple families living in one home, parents living with children, or unmarried couples where only one individual wishes to be on the loan.

The non-borrower's income must be used as a compensating factor  - not for qualification. This means that the lender will not add your household member's income to your income to make an approval decision.

Rather, the non-borrower's income will be considered a reason to approve a borrower even though his or her debt-to-income ratio is over 45%.

Debt-to-income ratio is determined by two factors: 1) the amount of the future house payment plus all other required monthly debt payments, and; 2) gross income.

For instance, someone making $4,000 per month and $2,000 in housing, credit card, and student loan debt payments would have a 50% debt-to-income ratio.

Normally such a home buyer would not qualify. The maximum debt-to-income for Homeready is 45%. Yet additional income from household members could help the lender approve the loan above the 45% mark, even though the borrower is not technically within guidelines.

Co-Signer Income

This program allows income from non-occupant co-borrowers. This is the term used for co-signers of the loan who will not live in the home.

For instance, parents who already own a home can co-sign their child's mortgage loan. The lender will use their income along with the main borrower's income for qualification.

Boarder/Roommate Income

In addition, the home buyer can use "boarder" income to qualify. A boarder is basically a roommate or someone renting space in your household. To use the income you must document rental payments and a shared living situation for the previous 12 months.

This feature makes homeownership much more feasible. Be sure to confirm your roommate will move into your new home with you. If so, they will be helping you qualify - and pay for - your mortgage!

Mother-in-Law Units/Accessory Dwelling Units (ADU’s) Rental Income

If the home you plan to purchase has a basement apartment, mother-in-law unit above the garage, or other accessory unit, you could use rental income to qualify.

Even if you do not currently have a roommate, you can find a renter for the additional unit in the new home and use proposed income to qualify. Unlike boarder/roommate income, you do not have to have 12 months history of shared residency.

You do not need previous landlord experience or education to use income from an ADU renter. Keep in mind that the home must be classified as a 1-unit home with an ADU, not a 2-unit home. Using rental income is still possible when buying a 2-4 unit home, but you may need landlord education and/or experience.

Income Limits for the HomeReady Mortgage

​Income limits are set by geographical areas. In underserved areas, there are no income limits. In more economically developed areas, Fannie Mae has limited the amount of money HomeReady applicants can make. This policy ensures the program is reserved for the ones who need it most. The following is a breakdown of income limits.

• Properties in low-income census tracts: no income limit
• Properties in high-minority areas and designated disaster areas: 100% of the area's median income
• Properties in any other area: 100% of the area's median income

For instance, a home buyer in Los Angeles County finds a home within an area that limits income to 100% of the median income. The median income for Los Angeles is $67,200 so that is the most the buyer can make and still buy the home.

If the borrower makes more than this, he or she could find a home in an underserved area with no income limit. Upon a successful home search, he or she could use HomeReady.

Fannie Mae has published HomeReady eligibility maps for each state that detail each geographical area. It can be difficult to see the exact boundaries. Be sure to check the property address of the home you want to buy and your income with your lender.

Lower Mortgage Insurance Costs with the HomeReady Program

​Fannie Mae has reduced the amount of required mortgage insurance coverage. This translates to lower cost for the borrower.

Private mortgage insurance (PMI) would cost around $520 per month on a typical 3% down loan of $450,000.

Under the HomeReady program, PMI is just $160 per month. The $70-per-month savings allows HomeReady buyers to afford more home for the same amount of money.

HomeReady program was created in the hopes of aligning with today's current buyer demographics, and to encourage both knowledgeable and sustainable home ownership.   If you have always thought home ownership was an unattainable goal for you, the HomeReady mortgage could be the answer to making you a homeowner!