By Dan Green, Homebuyer.com
HomeReady® is the branded name of Fannie Mae’s 3 percent down, low down payment mortgage loan. It’s an affordable mortgage program for first-time home buyers that’s also available to repeat buyers, and existing homeowners for a refinance.
Fannie Mae launched HomeReady in 2014. The program replaced the agency’s MyCommunity Mortgage program, which was restrictive and limiting.
HomeReady overhauled the former program and created new, flexible, affordable homeownership options for low- and moderate-income buyers.
HomeReady allows for a minimum down payment of 3 percent and subsidizes mortgage rates and loan costs.
Who Is Eligible for the Fannie Mae HomeReady Mortgage?
HomeReady eligibility is checklist-based. Buyers who meet each criterion are eligible for the program and assigned to it automatically.
Qualifying for HomeReady doesn’t require a separate mortgage application. Here are the requirements:
You must occupy the home you’re financing
HomeReady is for primary residences only. Home buyers cannot use it to finance a vacation home, Airbnb property, or another type of investment property. Co-signers are allowed, and at least one person listed on the mortgage must live in the property.
Your home must be a residential property
HomeReady is for attached or detached single-family residences, including townhomes, condos, rowhomes; and multi-unit homes of four units or fewer. Manufactured homes may be eligible. Commercial properties are not allowed.
Your mortgage must meet conforming mortgage guidelines
HomeReady is a Fannie Mae mortgage program, which means that loans must meet Fannie Mae’s conforming mortgage guidelines. Loan sizes must be within local conforming loan limits, buyers must provide proof of income, and loans may not be interest-only.
Your down payment must be at least 3%
HomeReady allows a loan-to-value (LTV) up to 97 percent of the purchase price. Buyers must make a minimum three percent down payment, which may come from any eligible source. Eligible sources include government down payment assistance programs, cash gifts from family or friends, cash grants, and loans.
Your income must be below average for your census tract
Household income for HomeReady homeowners may not exceed eighty percent of the median household income in the home’s census tract. Home buyers who earn too much money for HomeReady can access other low down payment loans, including the Conventional 97 program and the FHA 3.5% down payment mortgage.
You may not owe money on more than one other mortgaged home
HomeReady allows home buyers to have a financial interest in one other mortgaged property, which may be a vacation home, short-term rental property, or an investment. There are no restrictions on commercial property investments.
You must have a credit score of 620 or higher
HomeReady requires a minimum credit score of 620 for 1-unit and multi-unit homes. Fannie Mae uses the FICO credit scoring system, which ignores medical debt and collections.
You must attend a homeownership education class
Fannie Mae requires first-time home buyers to complete a homeownership education course as part of a HomeReady approval. The mortgage agency offers an online educational course called HomeView at no cost. Homeownership education reduces mortgage default risk by 42 percent.
HomeReady Income Limits
Fannie Mae created HomeReady in 2014 to help low- and moderate-income renters achieve their American Dream of homeownership, where low-to-moderate income is defined as earning less annual income as compared to your closest neighbors.
Home Ready home buyers may not earn more than eighty percent of their new home’s census tract’s income. Fannie Mae makes income limits available on its website as shown below.
Home Ready can be used in city, suburban, and rural areas. It lowers down payment requirements to 3 percent, drops mortgage rates to less expensive levels, and makes owning a home cheaper, faster, and easier.
HomeReady & Accessory Dwelling Units (ADU) and Boarder Income
When Fannie Mae first announced its HomeReady mortgage in 2014, the agency advertised the program as a mortgage for multi-generational households. It permitted boarder income from parents, grandparents, and children, all living under one roof and contributing to monthly payments.
The program expanded several years later to allow accessory dwelling units (ADU).
An accessory unit is an area with a kitchen and a bathroom within another home, usually with its own entrance.
Accessory units may be in the basement, above the garage, or attached to the subject property. ADUs may also be separate homes on the land of an existing property.
Home buyers can use income from boarders and accessory units to qualify for a HomeReady mortgage.
With boarder income, buyers can use payments received, dollar-for-dollar, as income toward the mortgage. Proof of payment can be in the form of canceled checks, Venmo or other digital transfers, or bank statements that show deposits into a bank account.
Income from accessory dwelling units cannot be used dollar-for-dollar as income on an application. Lenders will deduct 25% from rent collected on an ADU to account for vacancies and costs. Home buyers are recommended, but not required, to use signed lease agreements that prove their rental income.
HomeReady Mortgage Rates and Mortgage Insurance
HomeReady is an affordable mortgage program that offers subsidized mortgage rates to low- and moderate-income households.
A HomeReady buyer with average credit scores gets access to mortgage rates 0.25 percentage points below standard conventional rates. Buyers with high credit scores receive rates discounted by as much as 0.75 percentage points.
In addition, HomeReady discounts private mortgage insurance for eligible buyers. The typical HomeReady homeowner pays less for PMI and saves hundreds of dollars on mortgage insurance annually.
Because Fannie Mae discounts mortgage rates and private mortgage insurance, HomeReady home buyers save as much as $700 per $100,000 borrowed per year compared to standard mortgage borrowers.