Fannie Mae HomeReady: Income Limits And How It Works

When you’re buying a home, especially using a conventional loan, you’ll typically have to make a down payment that’s a certain percentage of the home value.

Unfortunately, saving a large down payment can make homeownership a challenge for many people. After all, the median home sale price in the third quarter of 2023 was $431,000. If you’re required to make a 10% down payment, you’ll need to save more than $43,000, which is more than many people make each year.

That’s where the Fannie Mae HomeReady mortgage comes in. This loan program makes homeownership more accessible to low-income borrowers, helping them to achieve the American dream of homeownership.

What Is The Fannie Mae HomeReady Mortgage?

The Fannie Mae HomeReady mortgage is a home loan specifically designed for creditworthy low-income borrowers, whether they’re buying a home for the first time or simply looking for their next home.

The minimum credit score requirements for a Fannie Mae HomeReady mortgage are the same as those for any other conventional conforming loan. However, the HomeReady mortgage program stands out by offering higher loan-to-value ratios (LTV), even for borrowers on the lower end of the credit score requirement.

There’s one catch though: There’s a maximum income to qualify to ensure that only low-income borrowers are benefiting from this program.

Benefits Of HomeReady

The Fannie Mae HomeReady mortgage offers plenty of benefits to low-income borrowers. If you fall below Fannie Mae’s income limit and want to buy a home for the first time, upgrade your home or refinance your mortgage, here are a few reasons to consider a HomeReady mortgage.

Low Down Payment

HomeReady mortgages have lower down payment requirements than other conventional loans, especially for borrowers with lower incomes or on the lower end of the credit score range.

Pricing Options

Our friends at Rocket Mortgage^® understand the unique obstacles that come with a housing market characterized by elevated prices as well as high interest rates. They have a couple of incentives that might help, available for both HomeReady and its Fannie Mae counterpart, Home Possible. Which option is right for you comes down to whether you could use the money up front or on the payments at the beginning of your loan.

Welcome Home RateBreak is a lender-paid 2-1 temporary buydown.¹ During the first year of your loan term, your rate is 2% below your permanent rate. In the second year, the rate is 1% below the note rate before rising to the contract rate in the third year.

On the other hand, you may want help upfront with the down payment and closing costs. If this is the case, you can get a $2,000 credit. If you make 50% or less of the area median income where you're looking to purchase, the grant is $2,500.

Reduced Mortgage Insurance

Like other mortgages, Fannie Mae HomeReady loans require private mortgage insurance (PMI) when your down payment is less than 20%. If you have an LTV of more than 90%, meaning a down payment of 10% or less, you’ll pay lower than standard mortgage insurance requirements. This helps low-income borrowers lower their monthly housing payments.

Your mortgage insurance is also cancellable, just like the mortgage insurance on a standard conventional loan. You can request that your mortgage insurance be dropped when you reach 80% LTV. Otherwise, it will automatically fall off when you reach 78% LTV.

Flexible Down Payment Options

In addition to having low down payment requirements, HomeReady mortgages also offer flexibility in the source of your down payment funds. Sources of funds for your down payment and closing costs may include:

• Gift funds: Gift funds are those received from another individual, usually a family member, to help you pay the down payment on your home. You generally need a gift letter from the other party to verify it’s a gift and doesn’t need to be repaid.
• Down payment loan programs: There are down payment assistance programs, many of which are state-specific, which you can use to buy a home. Some down payment loans are forgivable, while others aren’t.
• Home buyer grants: A home buyer grant, like a down payment loan, is a type of aid offered to make homeownership more accessible. The key difference is that grants, unlike loans, do not have to be repaid.
• Community Seconds: A Community Seconds is a type of loan that’s used alongside a Fannie Mae HomeReady mortgage. It’s a second mortgage that can be used for a down payment and closing costs. When combined with the HomeReady mortgage, it can be as high as 105% LTV.

There’s no minimum contribution required from you as the buyer, so up to 100% of your down payment and closing costs may come from these alternative sources.

Who Is Eligible For The Fannie Mae HomeReady Mortgage?

To be eligible for a Fannie Mae HomeReady mortgage, you must meet the following requirements:

• Your home must be a residential property. The property you’re purchasing must be a residential property, though it doesn’t have to be a single-family home. A HomeReady mortgage can be used for homes with one, two, three or four units.
• You must occupy the home. In addition to the home being a residential property, it must be your primary residence after you close. You can’t use a HomeReady mortgage for a second home or investment property.
• You must go through a home buyer education course: If all borrowers on the loan are first-time home buyers, then at least one borrower must go through a homeownership education course, which is offered for free by Fannie Mae.

HomeReady Requirements

Like other mortgages, HomeReady loans offered by Fannie Mae have some eligibility criteria in place. To qualify for a loan, you must meet the following requirements:

• Minimum credit score of 620
• Up to 97% loan-to-value ratio (LTV)
• At least a 3% down payment
• No more than 50% DTI

HomeReady Income Limits

As we’ve mentioned, HomeReady mortgages are designed to serve low-income borrowers. To ensure that happens, Fannie Mae has income limits in place to restrict who can qualify for this type of loan.

Currently, you can only qualify for a HomeReady mortgage if your income is 80% or less of your area median income (AMI). Because the income limit is a percentage of the local median, you can qualify with a higher income in a high-cost area than you could in a low-cost area.

HomeReady Mortgage Interest Rates

The mortgage interest rates on a HomeReady loan are no different than they are on any other conventional loan. Unlike other loan programs that help low-income borrowers, such as FHA loans, rates on HomeReady loans aren’t more competitive.

When you apply for a HomeReady loan, your interest rate is based on several factors, including your credit score, down payment and debt-to-income ratio. The lower the risk you present to the lender, the better the interest rate you’ll get.

How To Apply For A HomeReady Loan

Applying for a HomeReady loan is similar to applying for any other mortgage. It’s important to consider whether it’s the right loan program for you, as well as which lender best fits your situation. The following are steps to applying for a Fannie Mae HomeReady loan:

1. Assess your finances: Before applying for a HomeReady loan, or any mortgage, for that matter, it’s important to check in with your finances. Knowing your credit score, debt-to-income ratio, and other characteristics of your finances will help guide you in your mortgage decision.
2. Compare loan types: Don’t just assume a HomeReady loan is the best option. Compare the different types of loans on the market. Read about each loan program’s benefits and requirements to ensure you find the one that best fits your situation.
3. Shop around for lenders: Once you’ve settled on a loan type, start shopping around. Though Fannie Mae guarantees HomeReady loans, it doesn’t originate them. Instead, you’ll go to a financial institution, just as you would any other mortgage.
4. Get preapproved: In most cases, you’ll get preapproved for a loan before submitting your application. Preapproval has several benefits, including giving you an idea of your home budget and giving you a leg up when submitting home offers.
5. Complete your loan: Once you’ve had an offer accepted on a home, you’ll officially apply for your loan. Though the initial application process may go quickly, there may be some back and forth with your lender where you’ll need to provide additional information and documentation.

Alternatives To The Fannie Mae HomeReady Mortgage

The Fannie Mae HomeReady loan program is just one tool available to low-income borrowers. There are other types of home loans that are alternatives to HomeReady loans and can help you achieve your homeownership goals.

• Federal Housing Administration (FHA) loan: An FHA loan is one that’s originated by a private lender but backed by the Federal Housing Administration. FHA loans are available to borrowers with poor credit and offer competitive interest rates, making them ideal choices for borrowers who don’t qualify for a conventional loan.
• US Department of Agriculture (USDA) loan: A USDA loan is another government-backed loan, but this one is backed by the Department of Agriculture. This type of loan must be used to purchase, build or improve a home in an eligible rural area. Like HomeReady loans, USDA loans are designed for low-income individuals and have an income cap (though the income cap is higher than the one for HomeReady loans).
• Home Possible: The Freddie Mac Home Possible mortgage is a home loan designed for low-income borrowers. The Home Possible loan program is similar to the HomeReady program, including in its income limit and maximum LTV. The key difference is that it’s offered by Freddie Mac instead of Fannie Mae.
• HomePath^®: HomePath^® isn’t a type of mortgage. Instead, it’s a program offered by Fannie Mae that allows borrowers to search for homes that are for sale by Fannie Mae after having been foreclosed on. Because these homes are foreclosures, they may be more affordable. However, you’ll still need to qualify for a loan to purchase one of these homes.

What’s The Difference Between HomeReady And Home Possible?

HomeReady and Home Possible loans are nearly identical. Both loan programs serve low-income individuals who earn 80% or less of the area median income (AMI).

FAQs On Fannie Mae’s HomeReady Mortgage

If you are considering applying for a Fannie Mae HomeReady mortgage, make sure to read up on these frequently asked questions to learn more.

Is HomeReady for first-time home buyers only?

The HomeReady mortgage program isn’t only available for first-time buyers. You can also qualify if you currently own a home or have purchased a home in the past. However, if all borrowers on the loan are first-time buyers, at least one must go through a homeownership education course.

Does HomeReady allow non-occupant co-borrowers?

Yes, HomeReady allows non-occupant co-borrowers. At least one borrower must plan to reside in the home as their primary residence, but not all.

Where can I get a counseling certificate for the HomeReady program?

You can get a Certificate of Completion of Housing Counseling from most homeownership counseling or education programs. You can also choose to participate in the Fannie Mae HomeView program, which is free and counts as the homeownership education required for a HomeReady mortgage.

The Bottom Line: HomeReady Offers An Affordable Mortgage With A Minimum Down Payment

The HomeReady mortgage program offered by Fannie Mae helps make homeownership more accessible with its low down payment requirements, flexible down payment sources and reduced mortgage insurance. If you have decent credit but your income has made qualifying for a mortgage challenging, consider applying for a HomeReady loan.

That being said, HomeReady loans aren’t your only option. There are plenty of alternatives that may be more appropriate based on your credit score, income, location and more. Find out what type of mortgage is best for you by starting the process with Rocket Mortgage^® today.