Freddie Mac Home Possible Loans: A Helpful Guide

Home buyers face many challenges in the current housing market. As the prices of homes rise, it’s harder to save for a down payment and finance a new home. The Freddie Mac Home Possible® loan program could help if you find yourself in this situation. 

Qualifying borrowers will receive many benefits that make homeownership more affordable. For instance, you can take advantage of low down payment requirements and a low LTV ratio. But it’s a good idea to understand how the program works before applying.

What Is The Freddie Mac Home Possible Program?

Fannie Mae and Freddie Mac are mortgage-focused government-sponsored enterprises. Fannie Mae was created by Congress in 1938 to help improve the mortgage market.

In 1970, Freddie Mac was chartered by Congress as a private company. But neither company originates or services mortgages — their main purpose is to purchase conforming loans on the secondary mortgage market.

The Home Possible program helps low-income borrowers buy a home with just a 3% down payment. And borrowers can use multiple sources to pay for the down payment and closing costs.

What Are The Key Benefits Of A Home Possible Mortgage?

A Freddie Mac Home Possible mortgage comes with a number of advantages. Here are the biggest benefits of applying for this program.

Minimum 3% Down Payment

When you’re buying a home with a conventional mortgage, a 20% down payment is considered standard. The Home Possible program lowers the down payment requirements to just 3%. You will have to pay for mortgage insurance but it can be removed once you reach 20% equity in the home.

Finance Up To 97% Of Home Value

The loan-to-value (LTV) ratio compares how much you owe on your home to the value of your home. Home Possible loans allow you to finance up to 97% of your home value. This financing can help you cover your closing costs, insurance, property taxes and any additional costs that come with buying a home.

Incentive Options

When you get a Home Possible loan, you have a couple of options to ease the challenges associated with buying a home buying environment of high rates and higher home prices. Which option is best for you might come down to whether you can use the money more effectively over the first couple of years of your term or upfront.

First, Welcome Home RateBreak is a 2-1 temporary interest rate buydown funded by Rocket Mortgage^®1. For the first year of your mortgage, your payment is based on a rate 2% lower than your note rate. In the second year of the term, the rate is 1% below your contract rate. The rate settles permanently in the third year.

Alternatively, you can opt for an upfront credit of 1% of the loan amount up to $3,500. If the loan is below $200,000, the credit will be $2,000 as opposed to 1%.Those who make 50% or less when compared to the area median income will receive a $2,500 grant.

Multiple Down Payment Sources Allowed

Home Possible mortgages allow home buyers to take advantage of down payment assistance and closing cost assistance programs. You can also use financing from family members, co-borrowers, an employer-assistance program and secondary financing.

Flexible Credit Requirements

You can apply for the Home Possible with a credit score as low as 620, though additional fees may apply. When you apply, you’ll go through manual underwriting instead of an automated system. These low requirements are helpful for higher-risk borrowers and anyone with a complicated financial situation.

Lower Fees And Closing Costs

The Home Possible loan program includes built-in limits on closing costs. This makes it a more affordable option than other types of mortgages.

What Are The Freddie Mac Home Possible Guidelines?

Anyone can apply for the Home Possible program, but you must meet certain criteria to qualify. Here is an overview of the Freddie Mac Home Possible requirements.

Primary Residences Only

A Home Possible mortgage can only be used for a primary residence and can’t be used to buy an investment property or second home. You can apply with a co-borrower, but at least one person on the mortgage must be living in the home. 

You can also use the loan to purchase a multi-family home with up to four units as long as you live in one. Condominiums, co-ops and manufactured homes are also allowed.

Income Limits To Qualify

A Home Possible mortgage is meant for low-income borrowers, so you must meet the income limits to qualify. Your household income cannot exceed 80% of the median area income.

You can use Freddie Mac’s income eligibility tool to confirm your eligibility. But if you’re moving to a low-income census tract, there are no income thresholds.

Maximum Debt-to-Income Ratio (DTI)

Your debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income. Lenders look at your DTI to determine whether you can afford your monthly mortgage payments.

You’ll need a DTI below 43% to qualify for the Home Possible program. If your DTI is too high, you’ll want to spend some time paying off your debts.

Removable Private Mortgage Insurance (PMI)

One of the benefits of the Home Possible program is the low down payment requirements. But if you make a down payment that’s less than 20%, you’ll have to pay for private mortgage insurance (PMI).

This insurance protects your lender if you stop making payments on your mortgage. PMI is typically cancelled once you reach 20% equity in your home.

Homeownership Education

If you’re a first-time homebuyer, you’ll be required to complete an approved homeownership education course. These classes will provide an introduction to the home buying process and provide valuable information for first-time homebuyers.

For instance, you’ll learn about credit and why it’s so important in the lending process. You’ll also learn how to get a mortgage, find a home and close on your loan, and how to manage your money. And some of these courses may be available online.

Credit Score

You must have a FICO^® credit score of at least 660 to qualify for a Home Possible loan, though in some cases, you may be able to qualify with a credit score of 580 or higher. If your credit score is too low, you’ll want to spend some time improving it for applying.

What Are The Alternatives To A Home Possible Mortgage?

There are many advantages to taking out a Home Possible mortgage, but these loans won’t be right for everyone. If you’re unsure about the Home Possible program, there are other loan options you can consider.

Fannie Mae HomeReady®

HomeReady® loans are another conventional mortgage program offered by Fannie Mae. It’s similar to the Home Possible program, but borrowers can qualify with a credit score above 620. HomeReady loans may come with lower credit score requirements. HomeReady loans come with the same Welcome Home RateBreak and upfront grant options that Home Possible does.

FHA Loans

The Federal Housing Administration backs FHA loans and is a good option for low-income borrowers with poor credit. You can qualify for an FHA loan with a credit score between 500 and 580, though you will have to pay a 10% down payment. Credit scores above 580 only require a 3.5% down payment.

FHA loans come with upfront and monthly mortgage insurance regardless of the size of your down payment. And unlike Home Possible loans, you can’t get rid of your mortgage insurance once you reach 20% equity.

VA Loans

VA loans are mortgages for veterans, active service members, and eligible spouses. The loans are offered by private lenders and backed by the Department of Veteran Affairs. VA loans come with no down payment requirements, no PMI, and lower credit requirements.

USDA Loans

USDA loans help low to moderate-income borrowers purchase a home in an eligible rural area. The biggest difference between USDA and Home Possible loans is that USA loans don’t come with any down payment requirements. In addition, borrowers aren’t required to take out PMI. At this time, Rocket Mortgage doesn’t accept USDA loan applications.

Home Possible: FAQs

A Home Possible mortgage is a good option for low-income borrowers looking for low down payment requirements. Here’s some additional information about the Home Possible loan program.

Is a Home Possible Mortgage right for me?

The Home Possible program is open to anyone who meets the requirements, but it may be especially beneficial for first-time home buyers. In addition, it’s a good option for lower-income home buyers and fixed-income seniors who are looking to downsize. It can also be a good choice for anyone who’s self-employed or needs to apply with co-borrowers.

Do all lenders offer Home Possible mortgages?

Since Freddie Mac doesn’t originate or service mortgages, you’ll apply for the loan through a lender. Rocket Mortgage^® offers Home Possible Freddie Mac mortgages, but not all lenders do. You’ll have to contact your lender to see if they offer the mortgage program.

Can I use a Home Possible mortgage to buy a foreclosed home?

If you want to buy a foreclosed home, you may want to consider the Freddie Mac Home Path program. However, this program can only be used to purchase a primary residence and can’t be used for an investment property.

Can I refinance a Home Possible mortgage later?

Yes, it’s possible to refinance a Home Possible mortgage with a  Refi Possible^SM and RefiNow™ loan or any other standard refinance offering you qualify for. The refinancing requirements are similar to what you’ll see when applying for a Home Possible mortgage.

The Bottom Line: Home Possible Makes Home Buying Possible

The Freddie Mac Home Possible loan program makes homeownership more affordable for low-income borrowers. To qualify, you must meet certain income and property requirements. 

For instance, your income must fall below 80% of the area median income, and you can’t use the loan to purchase an investment property. If you’re having a hard time meeting the credit requirements, you can also look into the HomeReady program or another government-backed loan. 

If you’re ready to get started with a Home Possible loan, the first step is to find a lender and start the preapproval process. Once you start the mortgage application, your lender can tell you whether you qualify for the Home Possible program or another type of home loan.

¹The 2-1 temporary buydown offer is funded by Rocket Mortgage. Clients will receive an effective rate reduction of 2% below the note rate in the first year and 1% below the note rate in the second year. Offer only valid on HomeReady® or Home Possible® loans. Maximum loan amount of $350,000. Buydown funds may not be redeemed for cash or credit and are nontransferable. This offer cannot be retroactively applied to any loans in process or closed loans. Offer is subject to changes or cancellation at any time at the sole discretion of Rocket Mortgage. Additional restrictions/conditions may apply. This is not a commitment to lend.