Great loan for low-moderate income & first-time homebuyers

June 9, 2022
Posted in Programs
June 9, 2022 derekevansteam

With homeownership becoming more difficult, lenders have been working to develop new types of loans, grants, and opportunities to keep home buying attainable for all. One of these types of loans is called the HomeReady loan by Fannie Mae. This loan is excellent for low-to-moderate income earners and first time buyers because of great perks like 3% down. Also, it allows you to use income outside of your own to qualify, whether from a roommate or even someone that won’t live with you in the new home. Here’s what the HomeReady loan is all about:

Who is this loan best for?

The HomeReady loan was made for:

  • Low income buyers
  • First-time or repeat homebuyers
  • People with limited cash for down payment
  • Credit score ≥ 620; borrowers with credit scores ≥ 680 may get even better pricing
  • Those who will be using supplemental boarder or rental income
  • Those looking to purchase or refinance

Low rates

With HomeReady, buyers can get even lower rates than someone putting 20-30% down! To determine interest rates for loans, Fannie Mae relies on something called Loan Level Price Adjustments or LLPAs. This is basically a risk assessment for borrowers, helping to determine the likelihood of defaulting on a loan based on a combination of factors. This is why someone with a 680 credit score, for example, would wind up paying more than someone with a score of 780. 

But with the HomeReady loan, if you have a credit score of 680+, all LLPAs are waived! This means you could end up with a more favorable rate than someone putting down way more money upfront. Even if your score is below 680, down to 620, LLPAs are capped.

The down payment

The great thing about this loan is the lax down payment requirement, which is often one of the biggest barriers to home ownership. Like we mentioned above, the HomeReady loan only requires a 3% down payment. However, do note that you will also have to reserve 3-5% in closing cost fees as well. And the requirement only applies to one-unit homes. If you’re looking at a two-unit, this will require 15% down, and 3-4 unit properties require 25% down. However, the clientele who will most benefit from this loan are likely looking for single-units and won’t have to worry about putting more than 3% up.

Mortgage insurance

The HomeReady loan does require private mortgage insurance (PMI), though it’s often discounted. Your PMI amount will depend on your credit score, the loan amount, and more, so contact a HomeReady lender to get a more accurate estimate. 

The benefit of this conventional PMI over FHA mortgage insurance is that it will drop off after the buyer reaches about 20% equity, while FHA mortgage insurance never drops off unless you refinance.

Income limits

Screenshot of HomeReady AMI tool for Gilbert, AZ.

In order to ensure that those who would benefit most are able to access this resource, HomeReady has income eligibility requirements. If you

 make less than 80% of your area’s median income, then you qualify! Fannie Mae even offers an area median income tool so you can check if

 you meet the parameters ahead of time. Here’s a sample of what a block in Gilbert, AZ might look like using the tool:

Keep in mind that these figures can be different in specific areas, so reach out to a HomeReady lender to verify your eligibility.

Roommate income

One of the cooler things about the HomeReady loan is that you are allowed to factor in the income from a roommate. This gives you a much higher chance of qualifying as the lender will see that a portion of your mortgage payment will be covered by an additional source. The qualifications for this roommate are:

  • Not on the loan or title
  • Has lived with you for the last 12 months and will continue to live with you in the home you’re purchasing
  • Has helped pay rent 9 of the last 12 months
  • Their income isn’t more than 30% of your income

Accessory dwelling unit (ADU)

You may also use proposed rental income from the property you’re purchasing. However, the property must have an eligible accessory dwelling unit (AKA a mother-in-law suite, casita, etc) or a separate additional unit like what you’d get with a duplex.

Education piece

If you are a first-time homebuyer looking to use a HomeReady loan, you must take a homeownership course. The simplest one can be done online for free, and will only take around 3-4 hours to complete. It’s offered on Fannie Mae’s website and is called HomeView.

In conclusion…

The HomeReady loan is an excellent option for low-to-moderate income earners and first-time homebuyers that outshines FHA loans in a lot of areas. If you’re interested in seeing if you qualify, reach out to one of our experienced HomeReady lenders today.