2 Programs for Homebuyers With Good Credit (but Not Much Cash)
Dreaming of becoming a homeowner?
While it may be fun to fantasize about what color you’ll paint the living room and which shower curtain will adorn the guest bath, there’s one important consideration to take care of first.
How are you going to finance it?
Many mortgages require a sizable down payment — historically up to 20% of the full purchase price of the home.
Of course, 20% of a six-figure price tag is a pretty hefty bill to foot, which is part of the reason the average homebuyer is putting down far less these days.
But not every lender will let you get your foot in the door for less cash upfront… which is why we want to introduce you to two mortgage programs that may just help you reach your homeownership goals even if a large down payment isn’t in your budget.
Government-controlled corporations Fannie Mae and Freddie Mac both offer mortgage programs aimed specifically at candidates whose credit histories are good, but whose income might not allow them to save up a traditional down payment. Fannie Mae’s is called HomeReady, and Freddie Mac’s is called HomePossible.
Fannie Mae HomeReady and Freddie Mac HomePossible: How Do These Two Mortgage Programs Work?
If you’ve got decent credit but don’t earn enough to have much wiggle room, one of these programs may be a fit. But how do they work — and what’s the difference between them?
In a lot of ways, the two programs are very similar. Neither requires you to be a first-time homebuyer, and both allow you to finance up to 97% of the property value, which means your down payment can be as low as 3%, depending on your specific qualifications — and both make allowances that help you fork over even that small down payment from a variety of sources including gifts from relatives, government grants, or a second mortgage.
And both have similar income requirements: You must make 80% or less of the median income in your area.
Both programs allow non-occupant co-borrowers to help you apply for the loan, which can be helpful for those trying to help a family member relocate or buy their first home.
But as much as they share in common, there are some important differences between HomeReady and Home Possible that could help you decide which of the two to apply for.
Fannie Mae HomeReady
HomeReady is available to borrowers with a credit score of 620 or greater, though those with a score over 680 may get better rates.
If you have someone living with you who pays you rent, or a “boarder,” their income qualifies in determining your eligibility, as does the income of a non-resident co-borrower, which can be helpful if your earnings are low enough to endanger your approval.
To qualify for Fannie Mae HomeReady, at least one borrower must complete the Framework online homeowner education program, which costs $75. According to the FAQ, your lender may provide a credit against closing costs to make up for this fee, but it’s not guaranteed.
Of course, in the grand scheme of things, $75 is a pretty small price to pay for a financial product that could help you save money in the long run.
Freddie Mac Home Possible
Although Freddie Mac doesn’t publish its minimum credit score requirements, it does match Fannie Mae’s 3% down payment for the most qualified borrowers. However, only borrower income is counted when determining eligibility, so you can’t get a boost from the earnings of your co-borrower or spouse. (You may still be able to count your boarder or renter’s income, however.)
Furthermore, the occupying borrower may own another residential property — even a financed one. And you can skip the homebuyer education requirement if at least one borrower on the loan application is not a first-time home buyer.
If you are a first-time buyer and you need to meet homebuyer education courses, you can meet this requirement in a wider variety of ways:
- homebuyer education provided by HUD-approved counseling agencies
- housing finance agencies (HFAs)
- community development financial institutions (CDFIs)
- mortgage insurance companies or other programs that meet National Industry Standards for Homeownership and Counseling.
There’s also an option for a free online homebuyer training offered through Freddie Mac itself called CreditSmart – Steps to Homeownership.
What About FHA Loans?
There’s an alternative to Fannie Mae’s HomeReady and Freddie Mac’s Home Possible mortgages that you’ve probably already heard of: FHA loans.
In many ways an FHA loan is similar to the above-mentioned programs: You don’t have to be a first-time buyer, and you can score a down payment of as low as 3.5%.
And unlike the Fannie Mae and Freddie Mac products, FHA loans allow buyers with lower credit scores to qualify — though if your score is between 500-579, you’ll have to cough up a full 10%.
FHA loans may also offer lower interest rates than HomeReady or Home Possible, but they often have a longer appraisal process, and unfortunately, you’ll need to pay two types of mortgage insurance: an upfront premium at closing, plus monthly premiums.
Mortgage insurance can generally be cancelled through both Fannie Mae and Freddie Mac programs once your loan balance is less than 80% of the home’s value.
One thing’s for certain: Buying a house can be complicated, especially if you don’t have the cash for a large down payment on hand. It’s worth shopping around and reaching out to different lenders directly to see how they can work with you and learn more about your specific rates and terms.
Then, you can get back to the fun stuff — like comparing paint swatches and running your hands over carpet samples. Home, sweet home!
Jamie Cattanach’s work has been featured at Fodor’s, Yahoo, SELF, The Huffington Post, The Motley Fool and other outlets. Learn more at www.jamiecattanach.com.