As soon as my clients hear the words “conventional loan,” they think to themselves, “I’ll need to have 20 percent for the down payment.”
Not so fast. There is another, lesser-known loan program called the HomeReady mortgage from Fannie Mae. With the HomeReady mortgage, you can use as little as 3 percent for the down payment. The 3 percent option is also lower than a typical FHA loan, which requires a 3.5 percent down payment.
In addition, the mortgage insurance may be canceled when the homeowner reaches 20 percent equity in the property. The benefit could leave you with a lower monthly payment in the future.
And again, the HomeReady mortgage might be a smarter move than an FHA loan because, in the case of an FHA loan, the mortgage insurance premium stays for the life of the mortgage.
To obtain the HomeReady mortgage, you can have a credit score as low as 620, and you can either be a first-time homebuyer or a repeat homebuyer. It’s only for a primary residence.
Yes, there are income limits, but the program depends on the location of the property. Some areas in Hampton Roads do not have income limits, therefore you and your mortgage lender will need to review the requirements carefully. For example, there are no income limits in low-income census tracts.
I recently helped a client with the HomeReady mortgage. This was her second home purchase, and she wanted to put as little as possible into the down payment. She ultimately put down 3 percent.
My client did earn above the income limit for the loan program, but the property itself did not have an income restriction, and she could qualify. That’s why it’s critical to review income rules for each property. Today, my client is a happy new homeowner in Virginia Beach.
Who else is a strong candidate for the HomeReady mortgage?
- People who are ready to move from their first home to something bigger but who may not have the necessary down payment amount for a traditional conventional loan.
- People who plan to own the property for the long term.
- People who have rental income from a home they own.
As a final point, Fannie Mae announced in July plans to lessen its debt-to-income (DTI) restrictions. Fannie Mae raised its DTI ceiling from the current 45 percent to 50 percent. By raising its debt-to-income ceiling in some cases, it may mean more people will be able to qualify to buy a home.
That means in addition to the other highlights of the HomeReady program (for example, 3 percent down payment), the new DTI restriction may help you qualify for a larger loan amount.
If you want the benefits of a conventional loan but need a low down payment option, be sure to explore the HomeReady mortgage when the time is right.