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Fannie Mae HomeReady Loan: Your Ticket to Homeownership

Fannie Mae HomeReady Loan: Your Ticket to Homeownership
Tim Lucas - Home.com
Senior Editor, Home.com

What is a HomeReady® loan?

A HomeReady loan is a special loan type created by the mortgage agency Fannie Mae and available through many lenders across the U.S.

It comes with major advantages, especially if you’re a first-time homebuyer with low-to-moderate income. For instance, it requires just 3%-down and you can use income from a roommate or even someone that won’t live with you in the new home.

If you’ve been struggling to figure out how to buy a home in today’s market, this could be your ticket to homeownership.

What's in this Article?

Down payment requirements
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Income limits
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Mortgage insurance
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Credit score
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Who is eligible?
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HomeReady lenders
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Frequently asked questions
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HomeReady down payment requirements

One of the biggest advantages of the HomeReady mortgage loan is its low down payment requirement of just 3% of the home’s price. In other words, it allows for a 97% loan-to-value or LTV. So a $250,000 home would require just $7,500 down.

You’ll also have closing costs, which are around 2-5% of the purchase price, or at least $5,000 in the example above.

This may sound like a lot of money to come up with upfront. But you can cover 100% of the down payment and closing costs from sources other than your own money. Mix and match them to come up with all the needed funds.

Possible sources of down payment and closing costs funds:

  • Personal savings in your bank, investment, or even 401k accounts
  • Cash-on-hand can be used if you provide a letter certifying the funds aren’t borrowed and using cash is your primary method of payment. Cash must be deposited in a bank account or with an escrow company.
  • Gift funds: Relatives can contribute using a gift letter
  • Grants from a nonprofit, government, or another eligible source
  • Community Seconds® which are secondary loans that cover down payment and closing costs. They can come from sources such as your city, county, state, or another housing assistance organization. Sometimes these come with deferred payments or are repaid when you sell or refinance the home. Some programs forgive the loan altogether if you meet certain criteria. Learn more about down payment and closing cost assistance programs.

Keep in mind that the 3% down requirement only applies to one-unit homes. Homes with two units require 15% down and 3-4 unit properties require 25% down.

Down payment is a challenge for many first-time buyers, but that barrier is reduced when you use HomeReady.

HomeReady income limits

It’s important to know that not everyone is eligible for HomeReady. It’s reserved for those who make 80% of their area median income (AMI).

Most people don’t know their area’s median income, and that’s okay. Fannie Mae provides a lookup tool. For best results, type in a specific address. You can also browse by area. Here’s a screenshot of the tool displaying results for downtown Denver, Colo.

Fannie Mae HomeReady income lookup tool
Screenshot of Fannie Mae’s area median income lookup tool in Denver, Colo. Image: Fannie Mae.

As of May 2022, the median income for this area of Denver is $104,800, so your household can make up to 80% of that, or $83,840, and still be eligible for HomeReady.

Other current HomeReady income limits are:

  • Seattle: $87,600
  • Dallas: $68,640
  • Tulsa, Okla.: $58,400
  • Detroit, Mich.: $64,960

Remember that these figures can be different in specific areas so be sure to search by the exact property address. Or simply connect with a HomeReady lender to verify your eligibility.

If your income is higher than your area’s limits, try the standard 3% down conventional loan.

Roommate and ADU income

You can use income from a roommate or boarder to qualify for a HomeReady loan under the following conditions.

  • The roommate is not on the loan or title
  • The roommate has lived with you for the last 12 months and will continue to live with you in the home you’re purchasing
  • The roommate has helped pay rent 9 of the last 12 months (documentation required such as canceled checks)
  • Roommate income isn’t more than 30% of your income

You can also use proposed rental income from the property you’re buying. It must have an accessory dwelling unit (ADU) otherwise known as a mother-in-law suite, or an entire additional unit as in a duplex.

If you’re using the rental income to qualify, provide a current lease agreement if there’s a renter in the property already. If not, your lender will request Form 1007 which is an estimate of market rent for the unit.

HomeReady mortgage insurance

HomeReady requires private mortgage insurance (PMI), as do most conventional loans with less than 20% down. But Fannie Mae allows the PMI to be discounted versus a regular 3% down conventional loan.

Your PMI cost will vary based on your credit score, loan amount, and other factors, so it’s best to get a monthly payment quote from a HomeReady lender for your specific situation.

Conventional PMI has advantages over FHA mortgage insurance. While PMI drops off when you reach about 20% equity, most FHA mortgage insurance is non-cancelable. You have to refinance your loan into another loan type, sell the home, or pay off the house to get rid of FHA mortgage insurance.

For some homebuyers, that’s reason enough to choose the HomeReady loan over FHA.

What credit score do you need for a HomeReady loan?

You need a 620 credit score to be eligible for HomeReady. Those with a 680 or better score may get lower rates and easier qualification, but it’s worth applying even if you’re below that level.

HomeReady mortgage rates

Believe it or not, HomeReady mortgage rates may actual be lower than if you were to put 20% down. How can this be? It’s all about Fannie Mae’s Loan Level Price Adjustments or LLPAs.

The LLPAs are a risk-based pricing model that increases your rate for riskier factors in your loan profile. For instance, someone with a 680 score will pay a higher rate than someone with 720.

The exception is HomeReady, to some extent. If your credit score is 680 or higher, all LLPAs are waived. You could end up with a better rate than someone putting 20% or even 30% down!

For those with a score between 620 at 679, LLPAs are capped. You, too, could have a lower rate than someone with your credit score putting much more down.

It’s in an effort to make this loan program more affordable to lower income buyers. If you’re eligible, don’t pass up these savings.

Who is eligible for HomeReady?

Contrary to what you might think, you do not need to be a first-time homebuyer to qualify for HomeReady. Repeat buyers are eligible.

The main eligibility criteria is that you make 80% or less of your area’s median income.

First-time buyers must take a 3-4 hour homeownership education course discussed below.

Other than those basic requirements, eligibility is similar to any standard conventional loan.

Homebuyer education requirements

If all buyers using HomeReady are first-time buyers, one of them must take a homeownership course.

There are many options for homebuyer education, but perhaps the simplest one is a course that can be done online, is free, and is self-paced. It takes 3-4 hours to complete, according to Fannie Mae.

The course is called HomeViewTM and is offered by Fannie Mae as an approved homebuyer education resource.

HomeReady lenders

Many lenders are authorized to do HomeReady, but not all. If you’re interested in this program, ask any lender you speak with if they do these loans and if you’re eligible.

The good news is that Home.com’s lender network is approved to do HomeReady.

HomeReady vs Freddie Mac Home Possible

HomeReadyHome Possible
Down payment3%3%
Minimum borrower contributionNoneNone
Minimum credit score*620620
Sweat Equity**not eligiblePainting and staining only
Income limit80% of AMI80% of AMI
Use room mate income to qualify?YesYes
*Lower credit scores/no credit score accepted under some conditions. **Reflects Home.com’s parent company Fairway IMC’s guidelines as of May 2022

HomeReady vs FHA

HomeReadyFHA
Down payment3%3.5%
Minimum borrower contributionNoneNone
Minimum credit score*620580
Mortgage insuranceRequired until 22% equity reachedRequired for life of loan. Upfront premium also required
Income limit80% of AMINone
Use room mate income to qualify?YesNo
*Lower credit scores/no credit score accepted under some conditions

Non-occupant co-borrowers on a HomeReady loan

If you are putting down 5% or more, add a non-occupant co-borrower to help you qualify. A non-occupant co-borrower is someone who does not plan to live in the property but co-signs for the loan.

You use their income to help you qualify. In some cases, this strategy can help you get approved when you couldn’t on your own.

All co-borrower debts must be factored in, however. So if your non-occupant co-borrower has low income but high debt payments, he or she might not help you qualify.

Here’s an example of how a co-borrower could help on a HomeReady loan:

Borrower aloneNon-occupant Co-borrowerCombined
Monthly income$4,000$5,500$9,500
Monthly debt incl. house payment$2,200$1,500$3,700
Debt-to-income (DTI) ratio55% – ineligiblen/a39% – eligible

HomeReady FAQs

Do you have to be a first-time homebuyer to use HomeReady?

No. Repeat buyers can use this program. If you’ve owned a home in the past 3 years, you are exempt from the homeownership education requirement.

How do I apply for a HomeReady mortgage?

You can apply for HomeReady with regular lenders across the country. The program is administered by Fannie Mae and available through local and national banks and mortgage companies.

What is the HomeReady income limit?

80% of your area’s median income (AMI). Look up a specific area or address using Fannie Mae’s lookup tool.

Is homebuyer education required on a HomeReady refinance?

No. Homebuyer education is only required on purchases when all borrowers are first-time buyers. Since a refinance applicant owns a home already, no education is required.

What is a HomeReady mortgage?

HomeReady is a conventional loan meant for low-to-moderate income earners. It requires only 3% down. Buyers can use roommate income to qualify, get help from a non-occupant co-borrower, and receive a gift or other assistance for down payment and closing cost funds. Applicants making 80% or less of their area’s median income are eligible.

Do I qualify for a HomeReady mortgage?

f you make 80% or less of your area’s median income, maybe. Click here to find out.

Does HomeReady use household income?

You can use income from a boarder or roommate who has been living with you for the past 12 months, plans to live in the new home, and can document rent payments for 9 of the last 12 months. You may not use income from household members if they are not on the loan. Income limits apply to anyone on the loan, but does not consider household members not on the loan.

Does household income count toward HomeReady income limits?

All applicants on the loan must make at or below 80% of the area median income where the property is located. HomeReady does not consider household members who are not on the loan.

Is HomeReady an FHA loan?

No. It’s a conventional conforming loan created by Fannie Mae and available from major U.S. home lenders.

Further Reading

What’s the Minimum Credit Score For a Conventional Loan?

Conventional Loan Mortgage Rates: Are They Rising In 2021?

PMI on a Conventional Loan: Your Questions Answered