Fannie Mae is on a mission to make home buying easier. With its new HomeReady mortgage, the giant mortgage backer looks to help first time home buyers and repeat buyers alike. The Homeready low down payment mortgage program starts at 3% down.
This new mortgage program is laser-focused on helping minorities, Millennials, and mixed families on their road to homeownership. Here are few of the highlights of the HomeReady Mortgage program:
- As little as 3% down payment
- Lower private mortgage insurance costs
- Down payment sources include gifts, cash-on-hand, and down payment assistance programs.
- Use income from non-occupant co-borrowers to qualify
- Income from non-borrowing household members helps your approval.
- “Boarder income” (income from a roommate) helps you qualify.
- Use rental income from a basement apartment or mother-in-law unit.
Down payments have been one of the toughest parts of breaking into homeownership.
According to a Trulia report, a whopping 58% of renters age 18-34 said the down payment was the number one obstacle to owning a home.
Fannie Mae has its sights aimed right at that issue.
Downpayment Source
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.
Cash-on-hand down payments
But the real groundbreaking feature is the ability to use cash-on-hand. Many people save cash in a safe place at home rather than in a traditional savings account.
Most mortgage programs require an applicant to open a bank account, deposit their cash and wait 60 days. After two months, the borrower can submit bank statements that do not show an unexplained bank deposit.
HomeReady allows a potential home buyer to apply immediately. Just keep in mind that lenders may require various methods of verifying cash-on-hand. Still, this feature allows HomeReady borrowers to buy a home sooner.
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
Applicants don’t need perfect credit to qualify.
In fact, FICO scores down to 620 could be approved.
A credit score of at least 680, though, will yield the best rates. Fannie Mae waives some upward rate adjustments for borrowers with a 680+ score.
That means higher credit borrowers can receive a better rate for a 3% down loan than would 20%-down borrowers.
Be aware that lenders often impose “overlays” — tighter standards than Fannie Mae itself mandates. If your lender requires higher credit scores than those mentioned above, shop around to find a more lenient mortgage provider.
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 $230 per month on a typical 3% down loan of $250,000, according to MGIC’s Rate Finder.
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.
All buyers who use the program must complete home buyer education. The course is provided online and can be done according to the individual’s own pace and schedule.
There is a small fee of $75 for the education – a small price to pay for the flexibility of the program.
New homeowners benefit greatly from pre-purchase education. It’s hard to know all the ins and outs of homeownership by researching on your own. Going through formal training is a great idea for first time home buyers whether or not they use the HomeReady program.