What Are Low Down Payment Loans Like HomeReady and Home Possible?

If you are saving for your first home in Orange County, the down payment is often the biggest hurdle. HomeReady and Home Possible were designed to lower that hurdle for buyers with low to moderate incomes.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. Many first-time buyers I talk with assume they need 20% down. These two programs are a good example of why it pays to ask a lender about every option before you decide what you can afford.

This is general information, not lending advice. A lender is the right person to tell you which loan fits your situation.

Both programs allow a down payment as low as 3%, which means a loan of up to 97% of the home's value.

• HomeReady (Fannie Mae). Fannie Mae describes HomeReady as a low down payment mortgage with down payments as low as 3%.
• Home Possible (Freddie Mac). Freddie Mac sets the minimum down payment at 3%, with a maximum loan-to-value of 97%. Freddie Mac notes the down payment can come from flexible sources, including family, employer assistance programs and secondary financing.

Remember that the down payment is only part of your cash to close. You will also have closing costs. My article on first-time buyer closing costs walks through those, and how much to save for your first home helps you plan the total.

Both programs cap qualifying income at 80% of the area median income, often called AMI.

• HomeReady. Fannie Mae ties the limit to the census tract where the home is located, and lenders check it with Fannie Mae's area median income lookup tool.
• Home Possible. Freddie Mac caps qualifying income at 80% of AMI and offers an Income and Property Eligibility Tool that shows the limit for a specific property.

Because the limit is tied to the property's location, the same household could qualify for one home and not another. Ask your lender to run the address of any home you are serious about.

Often, yes. Fannie Mae's HomeReady product matrix says that when all occupying borrowers are first-time buyers, at least one borrower must complete homeownership education. Fannie Mae's free HomeView course meets the requirement.

Freddie Mac's Seller/Servicer Guide also lists Home Possible purchase loans where all occupying borrowers are first-time buyers as loans that require homeownership education. Freddie Mac's free CreditSmart Homebuyer U course is one way to meet it.

Take the class early. It is a good overview of the process, and it keeps a missing certificate from slowing down your loan later.

When you put less than 20% down on a conventional loan, lenders usually require private mortgage insurance, or PMI. It protects the lender, and you pay for it as part of your monthly payment.

The good news is that PMI on a conventional loan does not have to last forever. The Consumer Financial Protection Bureau (CFPB) explains:

1. You can ask to remove it in writing when your balance reaches 80% of the home's original value, if you have a good payment history and meet the other conditions.
2. It generally ends automatically when your balance is scheduled to reach 78% of the original value, as long as you are current on payments.

Freddie Mac also notes that on Home Possible one-unit homes, mortgage insurance can be canceled once the balance drops below 80% of the appraised value and cancellation criteria are met. Ask your lender to show you the estimated PMI cost on your Loan Estimate.

1. Talk with a lender first. Ask specifically about HomeReady, Home Possible and any other low down payment options.
2. Compare Loan Estimates. The CFPB says lenders must give you a Loan Estimate within three business days of your application. Compare rate, fees and mortgage insurance side by side.
3. Check income limits by address. Your lender can run the home's location through the program tools.
4. Finish the homebuyer course. If it applies to you, get it done before you write offers.

If you want to know whether a low down payment loan could get you into your first Orange County home, I'd love to help you think through the plan and connect you with lenders who can run your numbers. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.