HomeReady® mortgage: How to apply for this loan

Finding the right mortgage to finance your home is one of the most important decisions you’ll have to make when buying a house. For those unable to commit to the standard 20% down payment, there are two notable mortgages available through government-sponsored enterprises Fannie Mae and Freddie Mac that make lower down payments possible: HomeReady and Home Possible^®.

In this article, we’ll walk you through the benefits of a HomeReady loan, explore the requirements and explain all the steps you’ll need to complete to apply for this type of mortgage.

What is Fannie Mae’s HomeReady program?

A Fannie Mae HomeReady mortgage is a loan program that helps home buyers save on the cost of buying a house. This program offers adjustable underwriting guidelines with some flexibility around the loan terms depending on your situation. Some flexibility it permits is for borrowers to only need a 3% – 5% down payment or pay less on their closing costs.

Fannie Mae created HomeReady to provide an alternative to a Federal Housing Administration (FHA) loan. You should know that it’s similar to Freddie Mac's Home Possible program, but the two aren't the same.

HomeReady Vs. Home Possible

HomeReady and Home Possible are both great mortgage options geared toward lower-income, lower-credit score borrowers looking to build wealth through homeownership. Let’s briefly discuss the main differences between the two loan programs through Fannie Mae and Freddie Mac.

Fannie Mae HomeReady

HomeReady mortgages are home loans financed through the Federal National Mortgage Association (Fannie Mae). A HomeReady loan helps borrowers with low to moderate income buy or refinance a home by reducing the standard down payment and mortgage insurance requirements.

Freddie Mac Home Possible

The Home Possible mortgage program is backed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and helps to finance low- to moderate-income home buyers with similar benefits as the HomeReady program.

Cost assistance from Rocket Mortgage^®

What are the other benefits of the HomeReady Loan program? 

HomeReady can offer lower down payment requirements than other types of loans, speeding up your journey to homeownership. These loans also offer lower mortgage insurance requirements, increasing the chances for low-income buyers to get approved for a home loan.

• You can apply with a low credit score. You may be able to use alternative credit history, including rent and utility payments, to help you qualify. This is ideal if you don’t have the best credit score and need to work to build it.
• You can accept gifts for your down payment. HomeReady loans allow you to accept gifts toward your down payment – an option that could take more steps with other conventional mortgages.
• You can cancel mortgage insurance. You’re also allowed to cancel your mortgage insurance once you’ve paid down 20% of your home’s value.
• You can use the loan to refinance. You can also use a HomeReady loan to refinance your current home loan, but you can’t take cash out of your equity.

Who qualifies for a HomeReady loan?

You’ll need to meet certain criteria to qualify for this program. Here are the three major requirements:

• You’ll need a qualifying credit score. HomeReady loans require a minimum score of 620. Other mortgages have higher credit score requirements, so the reduced score minimum helps secure the financing you need, even if your credit isn’t perfect.
• You must not own any additional residences in the country. You don’t have to be a first-time home buyer to qualify, but you can’t currently own a home with this mortgage type.
• You must attend homeownership education courses. Homeownership courses will help prepare you for the financial challenge of owning a home. These courses require participation in various approved courses to help arm you with the education you’ll need as a homeowner.

What are the HomeReady loan’s Iincome limits?

Not everyone who meets the above requirements can qualify for a HomeReady loan. There are also some income eligibility criteria you’ll have to meet to get approved for this mortgage.

Your income must be equal to or less than 80% of your county’s area median income (AMI). You can determine your HomeReady eligibility by looking up your address’s AMI.

You may not have to worry about HomeReady income limits if you live in a low-income area. Low-income census areas are zones where the median household income is 20% below the location’s average median household. You can make more than the income requirements and still be eligible for a HomeReady mortgage.

How much do you need to put down on a HomeReady mortgage?

The low down payment requirements are the main reason you may be attracted to a HomeReady mortgage. These loans allow you to fund up to 97% of a single-family home. That means you must make a down payment of just 3% of the home’s value. 

HomeReady loans also let you accept large gifts from others to cover the down payment requirement. In fact, you can fund your down payment entirely with gifts.

Are HomeReady mortgages available for all homes?

HomeReady can be applied to a variety of home types. You can purchase 1- to 4-unit homes as long as one of the units will be your primary residence. 

You can use HomeReady for a planned unit development, townhouse, condo and more. Talk to your lender about the property types that they will finance. Read more on the Fannie Mae website and the Freddie Mac site about the full requirements and types of homes that qualify for HomeReady and Home Possible loans.

How to apply for a HomeReady loan

Do you think HomeReady is the right choice for you? If so, you probably have some questions about the application process. We’ll walk you through all the steps you need to follow to apply for a loan so you know what to expect.

1. Review and compare the HomeReady loan benefits

Look at the terms before you choose a HomeReady loan. Be sure you’ve reviewed all of the benefits of HomeReady loans carefully. These mortgages have higher interest rates than other conventional loans because of their lenient down payment policy.

If you decide that a lower down payment mortgage has the most to offer, proceed to Step 2.

2. Review the HomeReady loan requirements

Next, you’ll want to make sure you meet the qualifications, including the income limits, credit score requirements and homeownership education courses. Once you’re confident that you meet the requirements, you’re ready to find a lender.

3. Find a mortgage lender

HomeReady loans are offered through private lenders, but you’ll need to find an outside lender to apply through (you can’t apply directly with Fannie Mae). Most conventional lenders offer these mortgages, so you’ll have plenty of local, national and online lenders to sort through.

These low down payment mortgages are designed for all lenders, but a lender can opt out if they aren’t interested in servicing this type of loan. These programs are available through Rocket Mortgage.

4. Apply for a HomeReady loan

Once you choose a lender, you’re ready to apply for a loan. You’ll complete an application and provide supplemental documentation to verify your income and provide copies of your taxes. This step can take time if you have to retrieve hard copies or mail documentation. Rocket Mortgage can share your online bank account and tax information in real time and make this step happen quickly.

5. Wait for your approval decision

Once you’ve applied, your lender will crunch the numbers and determine if you’re approved for a mortgage, set your mortgage rate (which is the rate of interest you’ll pay) and decide how much money you’re approved for. Then you can start shopping for a home or make an offer if you’ve already found one.

FHA loan: An alternative to a HomeReady mortgage

FHA loans are government loans that, like HomeReady and Home Possible, offer lenient financial requirements for eligible home buyers. For example, the required down payment is only 3.5%. They could be a great alternative if you need more flexibility to qualify.

To begin with, you’ll need a median FICO^® Score of 580 or higher. However, to qualify with a credit score at this level, you’ll need to keep an equally low debt-to-income ratio (DTI) of 45% or less. In addition, no more than 38% of your monthly debt payments can go toward housing.

There’s additional good news for those with slightly better credit scores at a median of 620 or higher. Loans are reviewed based on several characteristics, but in many cases, you can get approved with a slightly higher DTI than you could on many other loans with a credit score of 620 or better. This gives you the flexibility of a higher home buying budget.

FHA loans vs. HomeReady vs. Home Possible

HomeReady and Home Possible loans target the same type of buyers as FHA loans, but they aren’t the same product. While the federal government backs the FHA loan, HomeReady and Home Possible are backed by private lenders Fannie Mae and Freddie Mac.

Since they’re conventional mortgages owned by a private lender, there is more flexibility with down payment requirements and credit history. As non-conforming loans, FHA loans work outside Fannie’s and Freddie’s purchasing standards.

The bottom line: HomeReady loans allow low down payments

Fannie Mae’s HomeReady mortgages are great products for low-income applicants who want to put down the minimum down payment for a mortgage. These mortgages allow you to use gifts toward your down payment. They also offer the option of canceling mortgage insurance once you’ve paid off 20% of the home’s value.

See what you qualify for today with Rocket Mortgage and explore your loan options for either of these programs. You may also be able to take advantage of our temporary buydown or upfront grant offers. Don’t let saving for a down payment delay the purchase of your dream house!