Fannie Mae’s HomeReady Program to include household income

Fannie Mae provides home-buying programs to make it easier for low- to moderate-income households to qualify for a mortgage loan. The HomeReady program, unveiled in 2015,  allows lenders to include income from non-borrowers within a household, such as extended family members, toward qualifying for a mortgage loan.

Officials at Fannie Mae said their research indicated that extended households have incomes as stable or more stable than other kinds of households at similar income levels.

Many borrowers live in households that include extended family. That extended family often contributes to the household expenses and finances. Until now that income couldn’t be used to help qualify for a loan. That’s the situation for about 19 percent of African-American households and 24 percent of Hispanic households, according to Jonathan Lawless, Fannie Mae’s vice president for underwriting and pricing analytics.

The HomeReady program opens mortgage access to a segment of the population that doesn’t fit the typical family structure and has had trouble obtaining a mortgage loan.

Highlights of the HomeReady Program

  • The program is available to both first-time home buyers and repeat homeowners.
  • As little as 3% down payment.
  • Lower private mortgage insurance costs.
  • Down payment sources include gifts, cash-on-hand, and down payment assistance programs.
  • Use income from non-occupant co-borrowers to qualify.
  • Income from non-borrowing household members helps your approval.
  • “Boarder income” (income from a roommate) helps you qualify.
  • Use rental income from a basement apartment or mother-in-law unit.

What is the minimum down payment?

You must put at least 3 percent down if you’re buying a one-unit property, 15 percent down if you’re buying a two-unit property, or 25 percent down if you’re buying a three- or four-unit property. One awesome feature of the HomeReady program is that 100 percent of the down payment can come from a down payment gift.

A parent or other relative can fund the entire amount of down payment and closing costs. Most other mortgage programs require what’s called a “minimum contribution” from the borrower.

Types of property eligible for the program?

You can buy a single-family home, condo, townhouse, or manufactured home — but if you buy a manufactured home, you must put 5 percent down. You can also buy a two- to four-unit property as long as you’re living in one of the units.

Is Mortgage Insurance required?

Yes, if you put less than 20 percent down, mortgage insurance is required. But, borrowers may have the option to cancel their mortgage insurance once their home equity reaches 20%. This can result in lower monthly payments down the road.

Whose income can be used to qualify?

If your income alone isn’t enough to qualify, you can add occupying or non-occupying co-borrowers to the loan. Lenders will also take into account income documentation (paystubs and W2s, for example) of people who won’t be on the loan but that will verify in writing that they’ll be living in the home with you for at least 12 months.

In-house rental income can be used to qualify?

It’s not uncommon in today’s economy to have family members or boarders who pay you rent. What is uncommon is to have that type of rental payments help qualify you for a mortgage loan. With HomeReady, rental payments that any borrower receives from one or more individuals who reside with the borrower (but who are not obligated on the mortgage debt and may or may not be related to the borrower) may be considered as acceptable stable income. (Up to 30% of the borrower’s qualifying income can from roommates or boarders.)

The boarder must have lived with and paid rent to the borrower for the last 12 months plus the boarder must provide documentation to demonstrate a history of shared residency (such as a copy of a driver’s license, bill, or bank statement that shows the boarder’s address as being the same as the borrower’s address).

Essentially, you may currently have a roommate but want to buy a home. If you want to keep that roommate situation when you move into your new home, you can use the roommate’s rental payments as qualifying income.

Credit score required to qualify

A minimum credit score of 680 is required to qualify for the HomeReady mortgage program. Although you need fairly good credit scores to take advantage of the down payment options, HomeReady’s flexible down payment requirements make up for the credit score criteria.

Down payments have been one of the toughest parts of breaking into homeownership. According to a Trulia report, 58% of renters ages 18-34 said the down payment was the number one obstacle to owning a home.

Final thoughts

It is not uncommon in today’s economic reality for some people to live in nontraditional households. Fannie Mae’s HomeReady program reflects the reality in society where more households include multi-generational family members, friends, and even boarders. This move to include household income may prove to open up mortgage access to a segment of the population that has had trouble obtaining mortgages in the past. Get more information at the HomeReady website.