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What is a HomeReady Mortgage?
A HomeReady mortgage is a type of conventional loan that helps low-income borrowers buy a home. To qualify, you can’t make more than 80% of the median income for the area where you want to buy.
The biggest attraction of a HomeReady loan is its low down payment requirement: just 3% of the home purchase price. Down payments can come from a variety of sources, including gifts or grants from family and friends.
HomeReady loans are guaranteed by Fannie Mae, a government-sponsored enterprise (GSE), but are funded by mortgage lenders. You apply for and close on your mortgage through a bank, credit union, savings and loan association, or other mortgage lender.
Bankrate Tips
For HomeReady loans closing between March 1, 2024 and February 28, 2025: Fannie Mae is offering a $2,500 credit to HomeReady borrowers who earn at or below 50% of their area median income. The credit can be applied toward a down payment or closing costs.
HomeReady Loan Terms
HomeReady loans are typically 30-year fixed-rate mortgages, but 10-, 15- and 20-year fixed-rate terms are also available, as well as adjustable-rate versions available with 5-, 7- and 10-year adjustable-rate terms.
HomeReady Loan Property Type
HomeReady Mortgages can be used to purchase a home or to refinance your current mortgage.
However, this program can only be used for your primary residence — that is, the home where you spend most of the year. It can be used for a single-family home or a qualifying condominium, apartment building, or manufactured home.
Duplexes, triplexes or four-unit properties also count if you live in one of them as your primary residence.
Who is eligible for a HomeReady loan?
To qualify for a HomeReady mortgage, you need:
- Minimum credit score of 620
- 3 percent down payment
- Income at or below 80% of the Area Median Income (AMI). You can use this tool to find out the AMI limit for your area.
- Debt-to-income ratio (DTI) of 45% or less (up to 50% in some circumstances)
First-time home buyers should also complete a home buyer education course.
Fannie Mae guidelines state that you can currently have one other property in your name that is financed (in addition to the property you plan to purchase) and as mentioned above, the loan must be for your primary residence.
It’s possible to qualify for a HomeReady loan even if you don’t meet the criteria, so it’s worth talking to your loan officer about it.
Benefits of HomeReady Mortgage
Benefits of a HomeReady loan include:
- Low down payment: A HomeReady mortgage requires only a 3 percent down payment, and the money doesn’t have to come from personal savings — it can come from gifts from relatives or friends, for example.
- Mortgage Insurance Reduction: With a conventional loan, you’re required to pay mortgage insurance if you put less than 20 percent down. The HomeReady program lowers the premium for borrowers who put less than 10 percent down. Plus, you can apply to cancel the premium once you’ve paid off enough of your mortgage to reach 20 percent of the home’s equity.
- Rental income at time of application: When applying for a HomeReady loan, you can include expected rental income as part of your qualified income, increasing your chances of being approved. This is an advantage for borrowers who need financing for a property that they intend to both live in and rent, such as a duplex or multi-unit townhouse.
Disadvantages of HomeReady Mortgages
- Income Limits: Your income cannot be more than 80 percent of the Area Median Income (AMI) for your local census tract. The area that matters is the area the property is located in (so keep this in mind if you’re moving to another county or municipality, or across state lines). You can use Fannie Mae’s search tool to see if you qualify based on your income.
- Property restriction type: HomeReady loans cannot be used to purchase second properties or vacation homes.
- Maximum loan amount: The loan amount depends on the property you’re buying. Loan amounts start at $75,000 and increase. For example, you can borrow up to $1,089,300 for a one-unit home and up to $2,095,200 for a four-unit property. However, be sure to check your county’s maximum limits before applying for a loan.
HomeReady and Home Possible mortgages
Home Possible is a program similar to HomeReady, but it’s backed by Freddie Mac instead of Fannie Mae. Both loans are designed for low-income borrowers.
The main difference is that if you’re buying a single-family home with a fixed interest rate, you’ll need a credit score of at least 660 to qualify for a Home Possible loan. With a HomeReady mortgage, you can buy the same type of home with a credit score as low as 620.
Comparing HomeReady and FHA loans
A HomeReady loan is just one type of low down payment mortgage. FHA loans also have low minimum down payments. Here’s how they compare:
HomeReady Mortgage | FHA Loans | |
|---|---|---|
| Minimum Credit Score | 620 | 580 (or 500 with 10% down payment) |
| Minimum down payment | 3% | 3.5% |
| DTI maximum value | 45% (up to 50% in some cases) | 43% (up to 57% in some cases) |
| Income Limit | 80% or less of the local average income | none |
| Mortgage Insurance | Cancellation possible at 20% of shares | Cannot be cancelled (in most cases) |
| Property Type | 1-4 unit primary residence | 1-4 unit primary residence |
HomeReady offers conventional loans that aren’t guaranteed or insured by any government agency. FHA loans, on the other hand, are insured by the Federal Housing Administration. Instead of getting an FHA loan through the FHA, you apply for and close through a private lender, just like a HomeReady loan.
Both loans require you to pay mortgage insurance, but with an FHA loan, you pay the premium for the life of the mortgage (though it’s cancelled after 11 years if you put down more than 10% down), and with a HomeReady loan, you can cancel the premium once you’ve paid 20% of the home’s price.
You can use either a HomeReady loan or an FHA loan to purchase a primary residence with up to four units. Neither type of loan can be used for a second home, vacation home, or investment property unless you live in one of the units.
Of the two, however, FHA loans are the more flexible when it comes to credit and income: You can get an FHA loan with a credit score as low as 580. Or even 500, as long as you put down at least 10 percent. Unlike HomeReady, FHA loans have no income restrictions.
Both mortgages offer some leeway in DTI ratios, but here too, FHA loans are more lenient. With an FHA loan, lenders will want a DTI of no more than 43%, but you have the wiggle room to push it up to 57% if your circumstances warrant. With a HomeReady loan, the ideal DTI limit is no more than 45%, but in some cases it can go all the way up to 50%.
Additional reporting by Maya Dollarhyde
