HomeReady Conventional Loan Requirements

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Nice home with a sold signA HomeReady loan is a mortgage product that is available to low- and moderate-income borrowers. It is designed to help borrowers who may not qualify for traditional mortgages. HomeReady loans are available through Fannie Mae, the government-sponsored enterprise that buys mortgages from lenders.

To qualify for a HomeReady loan, you must have a minimum credit score of 620. Additionally, your debt-to-income ratio must not exceed 45%. This indicates that your monthly debt obligations, including your mortgage, should not exceed 45 percent of your monthly income. HomeReady loans are offered with both fixed and adjustable interest rates.

The interest rates on HomeReady loans are typically lower than the interest rates on traditional mortgages. Investors and second homes are not allowed with a HomeReady loan. If you are interested in a HomeReady loan, you can apply through your local lender.

HomeReady Income Limits

Income tax formsTo be eligible for a HomeReady home loan, your income must not be more than 80% of the median income in your region (AMI).

Rental or boarder income, including income from accessory dwelling units, is considered qualifying income. An accessory dwelling unit(s) is a modest supplementary living area on the same property as a single-family home is known as an auxiliary apartment or secondary suite. It must have areas for cooking, eating, sleeping, and using the restroom away from the main house. The principal residence may or may not be accessible from the ADU, but it must be reachable without walking through the main house and there must be some expectation of seclusion from the main house.

Credit Requirement for a HomeReady Loan

Credit score meterThe HomeReady program typically requires a minimum credit score of 620 for borrowers with traditional credit profiles. Lower credit scores may be allowed if borrowers experienced an extenuating circumstance, such as a job loss or illness, that negatively impacted their income for a prolonged period of time.

Lenders may submit a non-traditional credit profile on behalf of applicants who have little or no credit history. The lender creates a non-traditional credit profile utilizing the borrower's payment history for housing (rent payments), utilities, and other credit sources instead of, or in addition to, using a regular credit report and score. In order to qualify for the HomeReady program, borrowers who have a non-traditional credit profile must not have been behind on any housing or rental payments in the previous two years,

Borrowers cannot have any pending judgments, and have a low monthly debt obligations.

HomeReady Down Payment Requirement

You are required to put down at least 3 percent of the buying price for a single unit property, such as a home, condo, co-op, or townhouse. A minimum down payment of 25% is required for properties with three or more units, while a down payment of 15% is required for properties with two units. The rental revenue from a multi-unit property may be utilized to help you qualify for the mortgage, under HomeReady regulations.

Your family, spouse, girlfriend, boyfriend, or fiancé may give you money as a down payment on a HomeReady loan. You don't have to use your personal funds to pay for the amount. Don't forget to let your loan officer and real estate agent know that you'll be using gift funds. Additionally, a mortgage gift letter is required to properly document the gift funds. Your lender can provide with a compliant gift letter.

HomeReady Debt to Income Ratio

A debt-to-income ratio, or DTI, is a measure of how much of your monthly gross income is spent on debt repayments like your mortgage and credit card bills. Although the FHA Mortgage Program allows a debt-to-income ratio higher than 50% in some situations, the debt-to-income ratio used by the HomeReady Mortgage Program is comparable with the debt-to-income ratio for regular mortgage programs.

Although a ratio of up to 50% may be approved in some circumstances, lenders typically apply a debt-to-income ratio of 43 percent to 45 percent to evaluate what size mortgage a borrower can afford. A debt to income ratio of up to 50% may be approved in some circumstances.

Mortgage Insurance Requirement

Borrowers are required by the HomeReady Mortgage Program to pay private mortgage insurance (PMI), which is a recurring monthly cost in addition to the monthly mortgage payment. In other words, PMI protects the lender against the borrower's mortgage default. The size of the down payment and the borrower's credit score affect the amount of PMI that must be paid; the larger the down payment, the less PMI must be paid.

The majority of standard low down payment options include PMI. The FHA and USDA mortgage programs need upfront and monthly mortgage insurance premiums (MIP). The HomeReady Mortgage Program does not require borrowers to pay upfront and monthly PMI premiums. The PMI premium is cancelled when the LTV ratio goes below 78%.

In addition, for mortgages with a loan-to-value (LTV) ratio between 90.01 and 97.00 percent, the cost of PMI required under the HomeReady program is often cheaper than for conventional mortgage programs or FHA mortgage programs, depending on your credit score.

The majority of conventional low down payment programs require PMI, while the FHA and USDA mortgage programs require upfront and continuing mortgage insurance payments (MIP). The upfront PMI price is not charged under the HomeReady Mortgage Program, and the monthly PMI fee is eliminated when your LTV ratio drops below 78 percent. Additionally, depending on your credit score, the cost of PMI required under the HomeReady program is often lower than for normal mortgage programs or the FHA mortgage program for mortgages with a minimal down payment.

Loan Limits for a HomeReady Mortgage

HomeReady mortgages provide a number of advantages, but they also have some disadvantages. There are restrictions on how much you may borrow when you buy a house with the  HomeReady program.

The maximum loan limit is set by the Federal Housing Finance Agency each year. The FHFA establishes higher lending limits for high-cost counties. The lending limit rises to $970,800 if you purchase a home in Hawaii, Alaska, Guam, or the U.S. Virgin Islands. The lending limit for a single family property for 2022 is $647,200 for most U.S. counties. You can look up your county with the HUD look up tool. Choose Fannie/Freddie as the Limit Type.

Eligible Property Types

Eligible properties include:Units in co-ops, provided the unit conforms to Fannie Mae's requirements, and the lender has received specific authority to deliver mortgages on co-ops to Fannie Mae;
Two-, three-, and four-unit properties.
Single-family homes, townhouses, condominiums, and apartments in planned unit developments (PUDs); prefabricated homes;
Existing structures and new construction;

Home Buyer Counseling Class 

The HomeReady loan program requires first time home buyers to attend a home buying class. Read more

Borrower Financial Reserves

Depending on your credit score, debt-to-income ratio, LTV ratio, mortgage program, number of units in the property, and other considerations, the HomeReady Program may require borrowers to have extra funds at settlement.

The payment reserve will be determined by the automated underwriting software.

Closing Costs and Escrow

The closing costs will come in at about 3% to 5% of the sales price. The cost varies from state to state and in some counties, the cost to purchase a home can move around. A lender familiar with the HomeReady loan program can provide you with a closing cost and escrow estimate.

Seller Paid Closing Costs

If you're short on money, you can ask the home seller to pay a portion or all of your closing costs. This arrangement is known as an interested party contribution. The seller payment must be clearly stated in the sales contract, and the lender must be informed of the seller's willingness to pay some or all of your closing costs.

There are limits on the amount that can be paid by the home seller. For down payments less than 10%, the maximum contribution is 3% of the sales price. Down payments of 10% to 25%, the seller is allowed by the HomeReady guidelines to pay up to 6% of the sales price.

A word of caution. Make sure you do not ask for too much concession. Otherwise, excess seller concession will be returned to the home seller. For example, if you ask for $3,000 and only $2,000 is applied to your closing costs, the remaining $1,000 will go back to the home seller.

Home Possible Loan Program

The Federal National Mortgage Association finances HomeReady housing loans (Fannie Mae). A HomeReady loan is designed to assist low- to moderate-income borrowers in purchasing or refinancing a house by decreasing the conventional down payment and mortgage insurance requirements.

Fannie Mae's competitor is the Federal Home Loan Mortgage Corporation (Freddie Mac) and like Fannie Mae helps to finance homebuyers with low to moderate incomes.

Freddie Mac offers a similar loan to low to moderate income homebuyers with a loan program named Home Possible. 

Both loan programs are nearly identical, with one big difference. The credit score requirement with HomeReady is 620. The credit score with Home Possible is 660.

Rotating question markFAQs About the HomeReady Loan

Q. Does HomeReady allow non occupant co borrower?

A. At the time of closing, the borrower(s) who occupy the property as well as those who do not may have an ownership interest in another residential property.

Q. Does HomeReady have income limits?

A. Yes, there are income limits for the HomeReady mortgage program. The maximum income allowed for a household to qualify for the program is 80% of the Area Median Income (AMI), which varies based on location.

Q. What is the maximum loan amount for a Fannie Mae HomeReady loan?

A. The borrower's debt to income ratio usually determines the maximum loan amount. The Fannie Mae loan limits (see above) can also determine the maximum loan amount.

Q.  Is HomeReady a conventional loan?

A. Yes

Read more questions and answers about conventional loans

Conclusion

In conclusion, the HomeReady conventional loan requirements are not as strict as one might think. As long as you have a steady income and a good credit score, you should be able to qualify for this loan.

SOURCE:
Homeready Mortgage
Homeready Mortgage Underwriting Methods and Requirements
Frequently Asked Questions

Recommended Reading

  1. What is a Conventional Loan Non-Occupant Co-Borrower?
  2. How to Get a Conventional Loan After Chapter 7 Bankruptcy
  3. Find out the credit requirements for a conventional loan.