Is a HomeReady® Mortgage Right for Me?
12/07/2017 Kristin Demshki
HomeReady® is a new mortgage program that brings flexibility and expanded eligibility to a wide range of borrowers. But how do you know if it’s right for you?
The HomeReady® program is designed to make homeownership attainable for more people in more places. But what does that mean for you? Read on to learn more about the guidelines and requirements of HomeReady® to see if it’s the right fit for you.
What is a HomeReady® Mortgage?
HomeReady® is a new mortgage program from Fannie Mae that offers financing up to 97% loan-to-value for a primary residence. HomeReady®, which is not restricted to first-time buyers, offers flexibility around income sources, down payments and mortgage insurance requirements.
Borrowers can use HomeReady® for home loan refinancing as well.
The HomeReady® program is ideal for borrowers who have:
- Limited cash to make a down payment; as little as 3% down for home purchases
- Low income or moderate income
- Supplemental income from boarders or renters (Non-occupant borrowers)
HomeReady® Mortgage Down Payments
The HomeReady® program is designed to help more borrowers become homeowners. Borrowers can make a down payment as low as 3% of the cost of the property, and they may use funds from other sources (including gifts, cash on hand, and down payment assistance programs) to make the down payment.
If you make a down payment less than 20% of the cost of the home, you will have to pay Private Mortgage Insurance (PMI), which is discussed further below. HomeReady® provides for a reduced mortgage insurance requirement, which, in many cases will result in a cost savings when compared to a standard conventional or FHA loan.
Income Requirements for HomeReady®
HomeReady® mortgages are intended for low- to moderate-income borrowers, and in many circumstances, it expands eligibility in low-income communities. There is no income limit in low-income census tracts, and the income limit in other areas is typically 100% of area median income.
One unique aspect of the HomeReady® program is the ability to combine income with other people living in the home. To qualify for the loan, a borrower may combine income from other sources, including:
- Boarder income, a.k.a. income from a roommate
- Non-borrowing household members, including a sibling, working child, friend, or other family member who is living in the home
- Non-occupant co-borrowers, such as a parent who wants to help a child qualify for a loan
- Rental income from an apartment within the property
Income limitations and eligibility requirements vary by area, so we recommend using the HomeReady® Income Eligibility Lookup Tool or contacting a PennyMac Loan Officer for more information about your specific area.
Credit and Debt-To-Income (DTI) Requirements
Borrowers with a credit score of at least 620 are eligible to apply for a HomeReady® loan through PennyMac. However, specific eligibility may depend on a combination of credit and DTI ratio.
DTI ratio represents the amount spent on debt payments every month (think mortgage payments, credit card bills, car payments, property taxes, homeowners insurance, etc.) compared to monthly gross income. Borrowers with up to 50% DTI ratio may be eligible but specific circumstances must be evaluated to determine eligibility.
If you have a higher DTI ratio, you may need a higher credit score to qualify for low down payment options.
Financial Education Requirement
Homeownership education is a requirement of the HomeReady® mortgage program for home buyers. For new purchase loans, at least one borrower on every HomeReady® transaction must complete the Framework online education program to learn more about sustainable homeownership and prepare for the loan process. HomeReady® refinance customers are exempt from this requirement.
HomeReady® Mortgage Insurance Guidelines
Borrowers who put down less than 20% of the property cost as a down payment for the HomeReady® mortgage program must pay mortgage insurance on a monthly basis. However, mortgage insurance fees (otherwise known as premiums) are often lower for HomeReady® mortgages than traditional mortgages.
PMI, which protects the lender if you fall behind on your mortgage payments, is typically lifted once the loan-to-value ratio is below 80%. (In other words, you typically will have to pay PMI until you pay down your loan to 80% of the purchase price of the property.)
HomeReady® Mortgage Rates
The rates and fees for a HomeReady® mortgage may be lower than those associated with a regular conventional mortgage or FHA loan. Many qualified borrowers will find the terms favorable over similar products, particularly other loans that allow low down payments.
Is a HomeReady® Mortgage Right for Me?
The HomeReady® program is here to help people achieve homeownership without meeting some of the traditional requirements for a down payment, income eligibility or other factors. If you agree with some or all of the bolded statements below, HomeReady® may be a good option for you:
|I want to make a small down payment.|| |
HomeReady® is a good option for potential homebuyers who want to make a small down payment (as low as 3% of the property value), but it’s not the only option.
HomeReady® offers flexibility in other areas beyond the down payment. If you are interested in a small down payment but don’t need the flexibility of a HomeReady® mortgage, an FHA-insured home loan may be another option.
|I want to use gifts or grants toward my down payment.|| |
HomeReady® allows for gifts, grants, and other types of down payment assistance to be used toward the down payment.
|I have low to moderate income or I live in a low-income area.|| |
HomeReady® is designed to make homeownership possible for people with low to moderate income. To this end, there are income limitations in certain areas to make sure the program can help as many potential homebuyers as possible.
|I want a loan for a primary residence.|| |
The HomeReady® program can only be used for your primary residence, not for an investment property or second home.
|I have relatives or roommates who can help me qualify for a loan.|| |
HomeReady® is great for borrowers who want to combine their income with another source. Borrowers can combine income with other occupants (such as roommates or family members) or non-occupants (such as a parent or other family member who will not live in the home) in order to qualify for the loan.
|I want to use income from boarders or renters to qualify for a loan.|| |
The HomeReady® program offers additional flexibility for accessory units and boarders.
If you are purchasing a 1-unit home with an accessory unit (defined as a separate dwelling with a kitchen and bathroom), the income generated from this unit can be considered rental income.
Additionally, if you have a roommate who plans to move into the newly purchased home with you, you can use “boarder income” to qualify for a HomeReady® mortgage.
Learn More About the HomeReady® Program
If you have additional questions about HomeReady® mortgage requirements, or if you want to apply for a HomeReady® loan, call a PennyMac Loan Officer today.