What Is Fannie Mae’s HomeReady® Loan?

A HomeReady® mortgage is a loan sponsored by Fannie Mae and designed to help people with low-to-moderate income and good credit buy a home.

This mortgage program allows as little as a 3% down payment, lower than most conventional loans. The program also offers low financing and mortgage insurance costs, making it an appealing alternative for first-time and low-income homebuyers who may not qualify for a standard conventional loan.

Lower-income borrowers may feel stuck and find saving the standard 20% for a down payment especially difficult. The good news is that whether you’re purchasing your first home or returning to the market, HomeReady® offers a more affordable path to qualifying.

Do I Qualify for a HomeReady® Mortgage?

Like any mortgage program, HomeReady® has specific eligibility requirements; however, lenders may apply additional standards. Here’s what you need to qualify.

Primary Residence

The home must be your primary residence. You cannot use a HomeReady® mortgage to:

• Purchase a rental/investment property
  

• Flip properties
  

• Buy a second home

Credit Score

You need a credit score of at least 620, though individual lenders may require higher scores.

While 620 is the minimum, borrowers with a 680+ credit score often:

• Qualify for more competitive interest rates
  

• Receive reduced loan-level pricing adjustments (LLPAs)
  

• Pay lower mortgage insurance costs
  

The HomeReady® loan program aims to be flexible, so you don’t need perfect credit to qualify. A FICO score of 620 is usually enough to qualify, which is the same minimum credit score required for Freddie Mac’s Home Possible® loans through First Residential.

However, a credit score of 680 and above gets you the best rates, and in some cases, Fannie Mae waives upward rate adjustments for borrowers with credit scores this high.

Income Limits

Since the Fannie Mae HomeReady® program is designed to help lower-income borrowers, there are limits on how much you can earn to qualify.

In most areas, borrowers are limited to earning no more than 80% of the area’s median income (AMI). For example, if the AMI in your area is $100,000, your household income must be $80,000 or less to qualify for a HomeReady® loan.

That said, income limits are more flexible in certain locations. If the property is located in a low-income area, defined as an area where the median household income is at least 20% lower than the surrounding area’s AMI, there is typically no income limit. Properties in high-minority areas and designated disaster areas have an income limit of 100% of the area’s median income.

To check your eligibility, you can use Fannie Mae’s HomeReady® eligibility checker to look up your address and confirm the applicable AMI limits.

Borrowers who earn above these thresholds may be better suited for a conventional mortgage or, if eligible, certain government-backed loans, such as VA loans.

Homebuyer Education

Another requirement for a HomeReady® mortgage is that the borrower completes a homebuyer education course. You can complete this online course at your own pace, but it typically takes 4 to 6 hours. This course costs $75 and teaches you everything you need to know about homeownership.

Fannie Mae emphasizes the importance of financial literacy and foundational homeownership education for achieving successful homeownership.

Benefits of a HomeReady® Mortgage

A HomeReady® mortgage offers several benefits to borrowers that may make it more appealing than other loan types.

1. Not Just for First-Time Buyers: HomeReady® mortgages are ideal for first-time buyers and those struggling to get onto the property ladder. However, they are also open to repeat buyers.

2. Low Down Payments: One of the top benefits of a HomeReady® mortgage is that it only requires a 3% down payment. This reduces one of the biggest barriers to buying a home.

3. Low Private Mortgage Insurance (PMI): Private mortgage insurance typically applies when the down payment is less than 20%. However, one of the benefits of a HomeReady® mortgage is that even if your LTV is above 90%, the standard PMI costs can be reduced. Once your LTV reaches 80%, you can request cancellation of PMI. PMI will automatically be canceled once you reach 78% LTV.

4. Flexibility in the Source of Down Payment: With many conventional loans, borrowers are required to contribute a minimum down payment of their own funds. HomeReady® is more flexible, allowing 100% of the down payment and closing costs to be funded with gifts, personal savings, or eligible assistance programs.

5. Flexibility on the Source of Income: Another area where potential borrowers struggle is the source of income. Most lenders require regular employment income to cover the mortgage repayments. However, the HomeReady® program is more flexible.

What is the Difference Between HomeReady® and Home Possible® Loans?

While Fannie Mae backs HomeReady® mortgages, Freddie Mac offers a similar loan called Home Possible®. Home Possible® loans are also designed to help low- to moderate-income buyers purchase a home. Both programs require lower down payments than other types of loans, have lower mortgage insurance requirements, and offer flexible eligibility criteria.

The main difference between the two programs is that Home Possible® loans typically require slightly higher credit scores. Traditionally, Home Possible® loans usually require a minimum score of 660, whereas HomeReady® loans accept a score as low as 620. However, First Residential’s minimum credit score for Home Possible® loans is more attainable at 620.

See if the HomeReady® Program is Right for You

HomeReady® mortgages are a great choice for those who want a more flexible way to purchase a home with a low down payment. However, other programs such as VA loans, FHA loans, or Freddie Mac’s Home Possible® program may also suit you.

The best thing to do is to get in touch with a loan specialist at First Residential to learn more about the HomeReady® program and other lending options.