What Is a HomeReady Mortgage? Benefits and Drawbacks

By Mark Kolakowski

Updated July 15, 2024

Reviewed by 

Lea D. Uradu

Fact checked by 

Betsy Petrick

What Is a HomeReady Mortgage?

If you are a low-to-moderate income borrower with good credit seeking a new home, it may be worth looking into the HomeReady mortgage sponsored by Fannie Mae. This mortgage, similar to the Home Possible program offered by Freddie Mac, allows for a 3% down payment versus the standard 20% one. The pricing provided on a HomeReady mortgage is better than or equal to standard pricing on a mortgage.12

Key Takeaways

• HomeReady is a Fannie Mae program for low-income borrowers.
• It offers low down payments, low financing costs, and low mortgage insurance costs.
• Borrowers have flexibility in obtaining the funds for down payments.
• A broadly similar program from Freddie Mac is called Home Possible.
• Eligible borrowers only need a 620 credit score to qualify, although scores of 680 or higher will earn them better price options.
• Down payment amounts are 3%, much lower than most mortgages.

How HomeReady Mortgages Work

The HomeReady program is open to first-time and repeat homebuyers, plus those seeking to refinance an existing mortgage. Eligible borrowers need to have credit scores of 620 or greater, and those with scores of 680 or more may receive even better pricing. HomeReady also offers affordable mortgage insurance coverage.3

Eligible borrowers are those whose income is 80% or less of the area median income (AMI) for the census tract in which the property is located as of July 20, 2019. This condition includes properties in low-income census tracts. A borrower under the HomeReady program may also have ownership interests in other residential properties. Still, only one of those other properties may be financed when closing on a HomeReady mortgage.4

Important

Community Seconds are second mortgages that are used to fund down payments and closing costs on first mortgages that are delivered to Fannie Mae.5

Benefits of a HomeReady Mortgage

In addition to a low down payment of 3%, HomeReady mortgages offer better than or equal to standard loan pricing. The program also offers lower than standard mortgage insurance coverage requirements when the loan-to-value (LTV) ratio is between 90% and 97%, plus the ability for the borrower to cancel monthly mortgage insurance payments when the LTV ratio drops below 80%. Additionally, the borrower is not required to use a minimum amount of personal funds for the down payment and closing costs but instead may tap other sources such as gifts, grants, and Community Seconds mortgages.6

Another significant benefit of the HomeReady mortgage is the flexibility of its terms. While income limits may apply for all borrowers, a HomeReady mortgage doesn’t have to be solely in the name of those who occupy the dwelling. Parents and other family members may be co-borrowers, even if they don’t plan on living in the home. If a family plans to purchase a home with an attached rental unit, they can use the potential rental income as an equation in their eligibility to boost their qualification for the mortgage.

$2,500 Credit for Very Low-Income Borrowers

Fannie Mae announced in January 2024 that it is offering a $2,500 credit to borrowers with total qualifying income no greater than 50% of the applicable area median income. The funds can be applied to to the 3% minimum contribution. The credit is available for loans purchased between March 1, 2024 and Feb. 28, 2025.7

Criticism of a HomeReady Mortgage

While HomeReady mortgages have multiple benefits, there are a few drawbacks. When you purchase a home using HomeReady, you will have limits on the amount you can borrow. This program (via Fannie Mae) uses FHFA’s conforming loan limit, which in 2024 is $766,550 for a single-unit property in the contiguous United States. If you buy a property in Hawaii, Alaska, Guam, or the U.S. Virgin Islands, the amount jumps to $1,149,825. The challenge of the conforming loan limit is that in some parts of the U.S., especially on the coasts, housing prices are much higher than the conforming limit set by the FHFA.

However, it is worth noting that in some areas where 115% of the median home value exceeds the conforming loan limit, it will be higher than the baseline limit. The loan ceiling in these areas for one-unit properties in high-cost areas rises to $1,149,825.8 However, just because you can borrow this amount if you are living on a low-to-moderate income, it may be risky to take out a loan that you may not be able to afford, even if you qualify for it on paper.

Special Considerations

There are also benefits for lenders who participate in HomeReady mortgages. For example, Fannie Mae’s Desktop Underwriter (DU) system automatically identifies loans eligible for HomeReady while offering a credit risk assessment.

Lenders can also receive risk-based pricing waivers for borrowers with credit scores of 680 or greater and LTV ratios over 80%. HomeReady loans can also be combined with standard loans in mortgage-backed security (MBS) pools and whole loan commitments.4

What Is the Interest Rate on a HomeReady Loan?

Interest rates on HomeReady mortgages vary just as they do for most loans. While those with credit scores as low as 620 can qualify for the HomeReady program, those with higher credit scores will get better rates.

Can You Put 20% Down With a HomeReady Loan?

HomeReady is designed for borrowers who are less likely to have 20% available to apply to the purchase of a home. However, there is no specific restriction preventing a 20% down payment.

Does HomeReady Require Mortgage Insurance?

Yes. Those who apply less than 20% toward a down payment will be required to pay mortgage insurance for as long as the loan-to-value ratio is greater than 80%.

The Bottom Line

HomeReady is designed to be a path to homeownership for low-income borrowers and is offered by Fannie Mae. Those eligible for the program can purchase homes with as little as 3% down, and those with very low income can earn a $2,500 credit that can be applied to that 3% requirement. The minimum credit score for the program is only 620, and the program is more flexible than traditional mortgages when it comes to the source of funds used for a down payment.

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