By Kenneth Sullivan
When shopping for a mortgage, low-and moderate-income homebuyers should explore conventional loans, such as Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, at banks and lenders to purchase a home. Both programs share the following advantages:
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- A minimum down payment of 3%.
- Borrowers who earn 80% or less of their median income.
- A requirement of private mortgage insurance (PMI), but homeowners can cancel the PMI without refinancing after they have paid off 20% of their home.
Despite these similarities, these loans have different credit score requirements for their primary mortgages. Fannie Mae’s HomeReady program approves buyers with a credit score as low as 620, while the Home Possible generally requires a credit score of 660. But some lenders may accept scores as low as 620 under certain conditions. These loan programs also offer secondary mortgages that serve as down payment assistance to cover the required 3% down payment and/or closing costs. Fannie Mae’s program allows for a secondary mortgage known as Community Seconds, while Freddie Mac’s is called Affordable Seconds. The funds for these secondary mortgages are typically provided by state or local housing authorities, nonprofits, or other government entities, not by Fannie Mae or Freddie Mac themselves.
Both Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs offer flexibility for borrowers with nontraditional or limited credit history. The lenders of both programs are responsible for documenting a history of borrowers’ on-time payment of sources, such as utilities, rent, cell phone, internet, and insurance, to prove that borrowers have financial responsibility. When filling out an application for HomeReady or Home Possible loans, borrowers may be able to include income from a boarder or renter. This documented income can increase the borrower’s total qualifying income, thereby helping to lower their debt-to-income ratio (DTI). Borrowers may also be required to complete a homebuyer education course, which helps prepare them for the responsibilities of homeownership. A key requirement for both programs is that the borrower must occupy the home as their primary residence.
Disclaimer: I am not a mortgage broker, nor do I work in a financial institution. My reason for writing this article is to offer hope to low-income individuals or families searching for a home. The information in this article came from the following sources:
- www.mymortgageinsider.com/low-income-home-loans-and-mortgage-programs/.
- www.rocketmortgage.com/learn/fannie-mae-vs-freddie-mac.
- www.pnc.com/insights/personal-finance/borrow/debt-to-income-ratio-why-is-it-important.html.
—Kenneth Sullivan