What is Freddie Mac's Home Possible® loan?

If you have a low income but can afford a monthly mortgage payment and a minimal down payment upfront, Freddie Mac’s Home Possible may be a good option for you. The Home Possible program only requires a 3% down payment and has more flexible borrower requirements than other mortgage options.

Let’s go over what the Home Possible mortgage program is and how to qualify. Then, we’ll dive into the pros and cons of the Home Possible program and discuss some alternative loan options.

What is the Freddie Mac Home Possible program?

Freddie Mac’s Home Possible program allows first-time and repeat home buyers who have low to moderate incomes to qualify for a mortgage loan. The program offers several benefits to make homeownership more attainable.

Freddie Mac is a government-sponsored enterprise (GSE) under the Federal Housing Finance Agency (FHFA). Freddie Mac was established by Congress in 1970 and taken over by the FHFA in 2008 during the U.S. housing crisis. Today, Freddie Mac offers several loan programs – including Home Possible – that make housing more affordable for low- and moderate-income borrowers.

The Home Possible program was created in 2014. Some of the notable features of the Home Possible loan include a low down payment requirement and cancellable mortgage insurance, as well as less stringent credit score, debt-to-income ratio (DTI) and loan-to-value ratio (LTV) requirements compared to other loan types.

Home Possible borrower requirements

In order to take out a Home Possible mortgage, you’ll have to meet a few borrower qualifications. Here’s a list of eligibility requirements you’ll need to secure financing through Home Possible.

• Down payment: The Home Possible program requires a 3% down payment. Some eligible sources for down payment funds include funds sourced from checking and savings accounts, gifts and grants.
• Credit score: You’ll need a credit score of at least 620 to buy a house with a Home Possible mortgage. If you’re interested in a manufactured home, an adjustable-rate mortgage or a no-cash-out refinance, you’ll need a 620 credit score to qualify with Home Possible.
• Income limit: Your total annual income cannot exceed 80% of your area’s median income (AMI). Check out Freddie Mac’s income lookup tool to find the income limit in your area.
• Loan-to-value ratio (LTV): The LTV you’ll need to qualify for a Home Possible loan ranges from 80% – 105%. Speak with your lender to see what LTV you’ll need to be eligible.
• Debt-to-income ratio (DTI): Freddie Mac doesn’t provide a maximum DTI requirement, though borrowers should aim for a DTI equal to or less than 50%. This is a general DTI guideline when qualifying for a mortgage.
• Property type: Owner-occupied primary residences are eligible for Home Possible financing. This loan program can’t be used to purchase investment properties, rental properties or vacation homes. Eligible property types include single-family homes, multi-unit properties, condominiums, cooperative housing (co-ops) and manufactured homes.
• Mortgage insurance: You’ll have to pay a percentage of your total loan balance every year in mortgage insurance. The amount you’ll pay depends on factors like your LTV. But once your total loan amount drops below 80% of your home’s appraised value, you’ll be able to cancel mortgage insurance on the Home Possible loan.

If all borrowers and co-borrowers are first-time home buyers, they will be required to take part in a home buyer education program. The National Industry Standards Committee sets guidelines for Homeownership Education and Counseling and borrowers can sign up locally for any homeownership education program that meets their requirements.

You can also browse your options online with programs like ReadyNest and CreditSmart^®.

Who are Home Possible mortgages for?

Promoting affordable housing is a big part of Freddie Mac’s mission. That said, this product is targeted at helping a specific segment of the market who could use assistance in home affordability.

While this program is specifically funded by Freddie Mac, Fannie Mae’s HomeReady^® program is very similar in terms of both qualifications and who it targets. Your lender will be able to help you decide which option is right for you.

So, who should consider a Home Possible loan? Let’s go over the communities that the mortgage program may benefit the most.

Low-wage earners

In order to qualify for this particular loan option, the income of all borrowers used to qualify can’t be more than 80% of the area’s median income. This metric is designed to help those with low incomes who can afford their mortgage payments to qualify for home affordability based on a low down payment and, in many cases, more modest fees.

First-time home buyers

Although you don’t have to be a first-time home buyer to take advantage of the Home Possible program, it can certainly be a great option if you are one. Keep in mind that both Fannie Mae and Freddie Mac consider a first-time home buyer to be anyone who hasn’t owned a residential property in the 3 years prior to the new home purchase.

Freddie Mac Home Possible pros

There are several advantages to a Home Possible mortgage program. Let’s walk through some common pros for home buyers.

Low down payment

The first major benefit of this loan option is that it only requires a 3% down payment. This is lower than the minimum 3.5% down payment required for FHA loans.

Special offers available

Home Possible comes with a loan level price adjustment (LLPA) credit of 1% of the loan amount up to $2,500. By qualifying for the program alone, you get a $2,000 credit. If you make under 50% of the area median income, the credit is $2,500. In both cases, the maximum loan amount is $350,000.

Low Loan-To-Value ratio (LTV)

Your LTV compares how much you owe on your loan to the value of your house and expresses this as a percentage. In most cases, you’re required to have an LTV somewhere between 80% – 95% depending on the type of mortgage you’re getting.

With Home Possible, you may be able to finance up to 105% of your home’s total value through the Affordable Seconds^® secondary financing program. Affordable Seconds is a second mortgage that can be used to fund your down payment and closing costs. Check with your lender to determine whether this could be an option for you.

Keep in mind that Rocket Mortgage^® doesn’t offer purchase loans with second mortgages.

Flexible down payment sources

In addition to using a second mortgage to fund a down payment, you can also receive your down payment from gift funds (including from family members). For a one-unit primary residence, your entire down payment may come from a gift. According to Freddie Mac, you can also fund a down payment through grants, sweat equity, proceeds from an unsecured mortgage loan and Employee Assisted Housing (EAH).

Additional down payment assistance programs may also be available to you. Be sure to look around and explore all your options.

Manual underwriting available

Manual underwriting means someone goes through and evaluates your income and credit history along with the amount of assets you have and the suitability of the property. This is different from automated underwriting, which involves computerized decision-making based on your loan application. Sometimes additional requirements, such as specific FICO^® Scores, may apply. For some borrowers, the manual underwriting process may be helpful.

Rocket Mortgage doesn’t offer manual underwriting for Home Possible loans at this time.

Lower Fees And Lenient Credit Requirements

All major mortgage investors like Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) have specific fees that are charged based on the loan amounts and different risk factors.

With Home Possible, the lowest median FICO® Score to qualify is 620. However, if your median credit score is 680 or better, there are no additional pricing adjustments on the loan. If your score is below 680, there’s a maximum price adjustment of 1.5% of the loan amount.

Freddie Mac Home Possible cons

There are some disadvantages to the Home Possible program. Let’s quickly run through what you need to know.

Small mortgage lending network

Although many mortgage lenders offer Freddie Mac’s Home Possible loan, including Rocket Mortgage, this isn’t universal. You may have to shop around to find lenders that can extend a Home Possible mortgage.

Small borrower pool

Because of the income limits and other requirements associated with the Home Possible loan, the potential pool of borrowers is smaller than the general housing market. Some lenders may choose not to offer this program because it’s not as prominent as other mortgage options.

Primary residence only

The Home Possible program is only available for primary residences. Primary residences are homes you occupy for the majority of the year. The loan program isn’t available for vacation homes or investment properties. The good news is that you can purchase up to four units, so you have the option to live in one unit and rent out the others.

Alternative government loan programs

Home Possible and HomeReady are two types of government-sponsored mortgage programs. However, there are also other options from the FHA, USDA (United States Department of Agriculture) and VA. Let’s go over each of these alternative loan options.

FHA loans

FHA loans are insured by the Federal Housing Administration (FHA) and have more lenient borrower requirements compared to other mortgage options. Borrowers with a credit score of 580 or higher can secure an FHA loan with a minimum 3.5% down payment. If your score lies between 500 – 579, you’ll be required to make a down payment that’s 10% of the home’s purchase price.

USDA loans

USDA loans are backed by the U.S. Department of Agriculture and are designed to help low-income borrowers in rural areas achieve homeownership. USDA loans don’t require a down payment if you live in a rural area with a household income that’s under 115% of the area’s median income. Most lenders require a credit score of 640 or higher and a minimum DTI of 43% to qualify for a USDA loan.

Rocket Mortgage doesn’t offer USDA loans at this time.

VA loans

VA loans are available for eligible veterans, reservists, members of the National Guard, active-duty personnel and qualified surviving spouses. A major benefit of VA loans is that there isn’t a down payment requirement. Eligible borrowers also don’t have to pay private mortgage insurance (PMI) on VA loans.

To qualify, you’ll have to show proof of your service by acquiring a Certificate of Eligibility (COE). You’ll also need a minimum credit score of 580 to qualify for a VA loan with Rocket Mortgage.

Are there Freddie Mac programs for low-cost refinances?

Freddie Mac and Fannie Mae have new refinance programs to help low-income borrowers with higher DTIs to refinance and take advantage of lower rates and the opportunity to lower their payment. They’re called Refi Possible? and RefiNow™, respectively.

There are several requirements for these programs, including the following:

• The owner/investor of your loan has to be Fannie Mae or Freddie Mac. You can check this by using Fannie Mae's loan lookup tool or this utility from Freddie Mac.
• This is for low-income borrowers. You can’t make more than 80% of the area’s median income.
• You need to have a DTI of 65% or less. This requirement is a bit more flexible than other conventional loan
• You have to be current on your mortgage. For the purposes of these loan options, that means not having a 30-day late payment in the last 6 months and only one in the last year.
• The property must be a one-unit primary residence. Multiunit, vacation or investment properties are not
• The loan has to be more than a year old but no more than 10 years old.
• This can only be used to lower your rate and/or make a term change. You can’t refinance to take cash out.

The bottom line: Freddie Mac Home Possible can help make homeownership possible

Freddie Mac’s Home Possible program helps low-income borrowers secure a mortgage and become a homeowner – all at a lower cost. Fannie Mae’s HomeReady program is nearly identical. To qualify, you’ll need to make no more than 80% of the area’s median income. There are also similar programs available if you’re looking to refinance with a lower income and higher DTI ratio.

If you’re ready to look into your loan options, you can apply online today.