Due to the popularity of the FHA mortgage program, Fannie Mae has felt the pinch of competition. In order to serve more people, Fannie May introduced the My Community Mortgage program. This program has been retired and was replaced with the HomeReady® program. The HomeReady® mortgage makes it possible for people with low to moderate-income to qualify for a home mortgage.
Only 3%* down Payment
First and foremost, borrowers are only asked to make a 3% down payment. This is very similar to the FHA requirement of 3.5% down payment. This one requirement opens the door to home ownership for a much bigger pool of applicants.
For example, consider a married couple buying a home priced at $160,000. With a conventional mortgage that required 10% down payment, the couple would need to save up $16,000 for the home purchase.
However, thanks to HomeReady®, the couple would only need to pay $4,800.
Down Payment Gifts are Allowed
Once again, taking a cue from FHA, the HomeReady® program will allow borrowers to use gift funds for the purchase of their new home. Fannie Mae has stated in their guidelines that the gift is allowed to cover the costs not only of the down payment but also closing costs.
The gift must come from an acceptable donor. Basically, the donor must be of blood relation to either the main borrower or the co-borrower. They can also be related to the person via adoption or legal guardianship.
The gift funds will have to be documented in order for Fannie Mae to approve the loan. Fannie Mae offers several scenarios that will satisfy the documentation guideline. Some examples are
- A copy of the deposit receipt showing the borrower has deposited the money as well as a copy of the actual check coming from the donor.
- A copy of the withdrawal receipt showing the money was withdrawn from the donor’s account and copy of the deposit receipt showing the money was deposited to the borrower’s account.
Income from Various Sources can be Counted
FHA has long had a provision that allowed a non-occupied co-borrower to sign on the loan. This meant that a dad could co-sign on the loan for his daughter and son-in-law to help get them approved for the loan, as an example. The dad was not required to live in the home as his main residence.
The HomeReady® program will allow a non-occupying co-borrower as well. However, HomeReady® has differing rules for a non-occupying co-borrower versus a non-borrower.
What is a non-borrower? Put simply, it is someone over the age of 18, living in the home with the borrower, but does not intend to be a part of the mortgage.
For example, supposed a married couple named Robert and Annette are renting an apartment and Annette’s 64-year-old Aunt lives with them due to medical reasons. Under the rules of the HomeReady loan, the following conditions would apply to the Aunt:
- The income earned by the non-borrower is not counted as part of the total household income when deciding income limits for the area
- The income earned by the non-borrower cannot be used to directly decrease the debt to income ratio for the primary borrowers.
- In the case that the primary borrower has a high debt to income ratio, the non-borrower’s income can be counted as a compensating factor
In a real-world situation, it is reasonable to expect the Aunt, in the above example, to pitch in and help her relatives if money is tight one month. An underwriter will look at this as a positive sign for the borrower during the loan underwriting process.
There are some rules for this type of scenario.
- The non-borrower does not have to be a relative
- The non-borrower must provide adequate proof of their income (W-2 forms, paystubs, etc.)
- The non-borrower will be asked to sign a form (pdf) stating their intention of living in the home for at least the next 12 months
Income from Your Boarder or Roommate Could be Allowed
Some people rent out a home or apartment and take on a tenant to help cover the bills. If you are in a situation like that and wish to keep your roommate/boarder when you purchase your own place, the HomeReady program is tailor made for you.
If you can provide enough evidence of the current rental agreement, as much as 30% of the borrower’s income may come from the boarder’s monthly rental payments. For this to work you will need to show that you have had a roommate for a minimum of 12 months and you will also have to show the roommate’s rent contribution for the previous 12 months.
Better Mortgage Insurance Rates
Currently, for people who use Fannie Mae to buy a home and only pay 5% down, their private mortgage insurance coverage percentage is 35%. However, with the HomeReady® program, the coverage drops to 25%. This can save the borrowers quite a bit of money with lower mortgage insurance monthly payments.
Another bonus of the HomeReady® program is that the mortgage insurance requirement will automatically stop once the balance of the loan has reached 78% of the home’s value.
HomeReady® is Designed for Lower to Moderate-Income Borrowers
It is important to note that Fannie Mae has made this program specifically for low to moderate-income borrowers. To determine if a borrower’s income level will meet the guidelines Fannie Mae has an online tool. The borrower simply has to pick a state and an area which they wish to buy a home.
Fannie Mae determines that a person’s qualifying income cannot be over 100% of the Area Median Income. However, in areas designated as Low Income Tracts, there is no limit on borrower income.
Home Buyer Class
The HomeReady® program requires potential home buyers to complete an online class called Framework prior to the home purchase. This class is designed to prepared people for the various responsibilities of owning a home. People that are new to home ownership may not be aware of all the nuances that come from buying a property. Items such as property taxes, saving for repairs, budgeting for regular maintenance items and ways to prolong the life of their home can really help people who have never owned a home. There is a small fee to take this class but if you ask your loan officer, they may have discounts that you can use to offset that cost.
The My Community Mortgage program has been very successful since its introduction. With the enhancements that are offered under the new HomeReady® program, low to moderate-income borrowers have another option at their disposal for becoming a homeowner
- Important Disclosure
*3% down payment on $250,000, 4.000%/ 4.815% APR, 740 FICO, 30-year fixed rate mortgage. Mortgage insurance is required. Rates subject to change. Subject to credit approval. At least one borrower must be a first time home buyer. Borrowers who have not held interest in a property in the last three years are also considered first time home buyers.
HomeReady® is a registered trademark of Fannie Mae.