A HomeReady mortgage makes homebuying for 3% down a reality

It’s no secret: Through the years, it’s gotten more expensive to buy a house. In the mid-1970s, it cost an average of $40,000 to buy a new home. Now? Add an extra zero (and then some) to that number. New homes are selling for an average that’s closer to $450,000.

Unfortunately, salaries haven’t accelerated at the same rate. If you want to buy a home, you might feel like your dream is just that — an unattainable dream. Especially if your paycheck doesn’t allow you to set aside much, if any, in savings.

But creditworthy borrowers who qualify for a HomeReady® mortgage could actually turn that feeling into a reality. How? We’re glad you asked.

A HomeReady mortgage is a conventional loan offered by Fannie Mae (a.k.a. the Federal National Mortgage Association, a government-sponsored organization). It’s tailored toward low- to moderate-income borrowers and allows you to purchase a home for just 3% down. It also has flexible requirements when it comes to where you get the money for your down payment.

HomeReady mortgages are available through various lenders, including Ally Home.

Many traditional home loan lenders recommend that you put down as much as 20% when you buy a home — a potentially large roadblock to homeownership. But when you qualify for a HomeReady mortgage, you’re only required to make a down payment of 3% of the purchase price on a single-family home. That could be the difference between saving for months versus years (or even decades) to purchase your first home.

For example, let’s say you want to buy a $150,000 house. If you need to put down 20%, that’s $30,000. With a HomeReady mortgage, you only need to have $4,500 to purchase that same home — making your dreams of homeownership more attainable.

Both first-time and repeat homebuyers with low to moderate income and low credit scores can qualify for the program. But let's unpack some of the requirements further.

First of all, if all the borrowers are first-time homebuyers, then at least one borrower must take the Framework homeownership education course (or meet one of the exceptions).

With regards to the program’s income limit, you can qualify for a HomeReady loan if your income is equal to or less than 80% of the area median income (AMI) for the property’s location. (If you have a spouse, their income will qualify if they’re a co-borrower.) Since cost of living can vary greatly depending on where you work versus where you’re looking to live, you’ll want to check out the Income Eligibility by Census Tract Lookup to make sure you’re eligible.

What exactly does all that mean? Say you’re looking for a house north of Sacramento, in Sutter County, California. To qualify, your annual income will need to be less than or equal to $47,600. Or if you’re looking to settle down in Newark — located in Essex County, New Jersey — you’ll need to make no more than $74,320 a year.

Borrowers must also meet credit score requirements. Don’t have a credit score or a credit history? Don’t worry. Even if you have non-traditional credit, you’re still eligible for a HomeReady mortgage.

A HomeReady mortgage also gives borrowers flexibility when it comes to your debt-to-income (DTI) ratio — the amount of your income that goes to paying off debt. Many lenders won’t allow you to exceed 43% DTI, but house hunters can qualify for a HomeReady mortgage even if they have a DTI of 50%.

The HomeReady Program opens a lot of doors when it comes to where you get the money for both your down payment and closing costs (which can range from 2 to 5% of a home’s final sale price).

Unlike traditional mortgages, which require your down payment to be mostly (if not all) of your own money, a HomeReady mortgage lets you pay for these expenses with funds from outside sources, including gifts, grants, and Community Seconds, another Fannie Mae program that helps eligible homeowners. (Of course, you can use your own savings, but it’s not a requirement.)

If you put down less than 10%, you will need to have mortgage insurance (MI). This coverage helps protect the lender in case you fall behind on your mortgage payments.

With a HomeReady mortgage, MI can be cancelled once your home equity reaches 20% (unlike an FHA loan). In other words, once the amount of your down payment and the amount you’ve paid toward your loan principle equals 20%, you can cancel the coverage, making your monthly payments lower.

If you’re looking to become a homeowner, a 20% down payment shouldn’t be the one thing standing in your way. Instead, a HomeReady mortgage and a 3% down payment could have you kicking back in your new home in no time.