As of December of 2015 one of the most innovative loan programs to come around in a long time was introduced to help those who may have trouble buying a home due to down payment and closing cost issues or other barriers.
Fannie Mae introduced HomeReady to address the changing demographic of today’s home buyers and help those own their own home who might not otherwise be able to.
Over the years there have been numerous programs that have helped buyers come up with the funds needed for a down payment through various Down Payment Assistance Programs and they’ve done quite a good job.
Home buying assistance comes in different options from different entities but for whatever reason they’re not very well publicized. Perhaps it is due to the fact that the government agencies who oversee these programs aren’t’ sufficiently funded in order to promote the availability of home buying assistance or maybe it’s even that some lenders would rather concentrate their efforts in other areas.
Yet other programs are readily available and not state or government-sponsored such as the government-backed FHA, VA and USDA loans. In this article, we’ll tackle the various low and no down payment programs as well as identify sources for funds necessary to close on a home purchase.
And finally we’ll talk about the new Fannie Mae HomeReady program and how it might very well be the best option out there.
Government-Backed Mortgage Loan Programs
The Department of Housing and Urban Development created the Federal Housing Administration, or FHA.
FHA provides guidelines lenders use and if the loan is approved using standard FHA protocol the loan is then eligible for a government backed loan guarantee. Should the loan ever go into default, the lender is compensated for the loss. This compensation is financed by a set of mortgage insurance premiums paid for by the borrowers, one upfront premium that is rolled into the loan amount and an annual premium paid monthly for the life of the loan.
The down payment requirement is 3.5% of the sales price. The FHA loan program is used to finance a primary residence only and cannot be used for a rental property or vacation home. The down payment can come from the borrower’s own funds, a gift from a family member or a qualified non-profit. This gift can also include enough funds to pay for the borrower’s closing costs as well. FHA guidelines ask the borrowers on the loan application show at least $500 of their own funds in the transaction. FHA programs do allow for non-occupied coborrowers who can help with loan qualification. These coborrowers must be family members but they can be on the loan in order to boost income.
Debt to income ratios for FHA loans are 31 and 43. This means the total housing payment, including taxes, insurance and mortgage insurance, should not exceed 31% of gross monthly income for all borrowers on the loan application and all monthly credit obligations should not exceed 43% of gross income.
The Department of Veterans’ Affairs introduced the so-called G.I.
Bill in 1944 to help returning soldiers more easily assimilate back into civilian life and obtain basic education or training for a new job. The original G.I. Bill included funds to help start a business and it also developed a mortgage program that required no money down from the veteran. In addition, the VA loan program prohibits the veteran from paying certain closing costs.
The VA mortgage is only allowed for an owner-occupied property and cannot be used to finance a rental property. While FHA loans permit a non-occupying coborrower to help with additional income VA guidelines require the veteran and the occupying coborrower to qualify without the benefit of a third party that will not occupy the home. The Department of Veteran’s Affairs also offers a loan guarantee to the lender and is financed by what is known as the Funding Fee.
The funding fee is expressed as a percentage of the loan amount but does not have to be paid out of pocket and is typically rolled into the loan amount. Should the loan ever go into default, which is rare because VA loans have the lowest delinquency rate when compared to other mortgage types, the lender is compensated up to 25% of the loan amount. Only eligible veterans, active duty and certain National Guard and Armed Forces Reserves qualify for this program.
The United States Department of Agriculture, or USDA also has written guidelines for lenders to follow.
A USDA loan is designed to help finance rural and semi-rural properties and is a no-down payment product. When a potential buyer shops for a home and wants to take advantage of the USDA program the lender first logs onto the USDA property eligibility website, types in the property address and sees whether or not the potential purchase is in an eligible area. Typically any urban or suburban area is not eligible for a USDA loan.
As with the other two government-backed mortgage programs, USDA loans are designed for a primary residence only and not for a rental or second home. USDA loans are also guaranteed and funded by the Guarantee Fee which is currently 2.00% of the sales price of the home and may also be rolled into the loan amount.
Unlike VA and FHA loan programs, there are income limits. In general, all income earned by those living in the household cannot exceed 115% of the median income for the area.
Of the three government-backed mortgage programs, only the USDA program has geographic and income limitations.
Down Payment Assistance Programs
Down payment assistance programs are designed to help those who are having trouble saving up enough money to cover a down payment and closing costs on a real estate purchase.
Used in conjunction with any qualified mortgage program from government-backed to conventional, down payment assistance is available either as a grant or a loan.
A grant is nothing more than a cash grant and does not have to be repaid. A loan may have to be repaid under certain circumstances and is issued to help pay for a down payment and closing costs associated with buying a home.
The California Housing Finance Agency, or CalHFA, created the California Homebuyer’s Down Payment Assistance Program or CHDAP, is a loan but the repayment is actually deferred.
The loan amount is 3.00% of the sales price of the home or appraised value, whichever is less. Buyers must be a first time home buyer which technically means buyers cannot have owned a home within the previous three years.
When using this loan with an FHA mortgage for example with a 3.50% down payment, the CHDAP loan would pay for 3.00% of the down payment leaving the buyers to come up with the remaining 0.50%.
The CHDAP loan does not have to be repaid until the home is sold and the mortgage paid off or refinanced and appears as a second, or a junior lien, subordinate to the first mortgage. Interest will accrue on the CHDAP loan at the current market rate and must be paid off when the property is sold or the loan is otherwise retired.
There are income limitations as the program is designed for low to moderate income earners. The income limitations are based both upon location as well as number of people living in the household, much like the USDA program however there are no geographical restrictions. For example, in San Diego County with four people living in the property, eligible income may not exceed $87,250 as of December 2015.
The sales price of the property may also not exceed $400,000 or $600,000, depending upon the location of the property.
The CHDAP does not allow for any non-occupant coborrowers on the loan and all income must be verified under the very same methods as for the first mortgage. This means pay check stubs, W2 forms and federal income tax returns if any of the borrowers are self-employed. If the income cannot be verified or otherwise does not qualify using conventional or government-backed loan guidelines, it cannot be used to help qualify. Debt to income ratios are limited to 45% of the borrower’s gross monthly income. Qualifying debt used in this calculation include the principal and interest payment, property taxes, hazard insurance and mortgage insurance plus other monthly credit obligations such as a car or credit card payment, spousal or child support payments and day care.
Credit guidelines are relaxed but there must be a minimum 640 credit score. Lenders will use the lowest middle score of all borrowers and all borrowers must attend a homebuyer education course as well. This can be done in person or online.
CHF Platinum Grant
A cash grant is just that- cash in the form of a grant which means it doesn’t have to be paid back like the CHDAP does. One such grant offered statewide is through the California Homebuyers Fund. This is a true gift and no interest accrues and is referred to as the CHF Platinum Grant. The amount is 3.00% or 5.00% of the sales price of the home and is most often used along with an FHA first mortgage lien but may also be used with a VA, USDA or conventional loan products using guidelines set forth by Fannie Mae and Freddie Mac.
Some grant programs require the grant to be repaid until the borrower occupies the property for a specific length of time such as three to five years but the Platinum Grant has no such restrictions. It’s free money.
The Platinum Grant also has income limitations and they’re the same as the CHDAP program using the same guidelines and the total debt ratio cannot exceed 45% of the borrower’s gross monthly income.
However, there are no purchase price limits but the amount borrowed may not exceed $417,000. One facet of this program when compared to others is the lack of homebuyer education needed nor do the borrowers have to be first time homebuyers however this program does require the borrowers have a minimum credit score of 640. For those who are yet to establish an acceptable credit profile, the 640 minimum score might be a bit out of reach at first. For those who can’t quite reach the 640 mark, speak with a loan officer who can provide insight on what needs to be done in order to attain the qualifying score.
Because the CHDAP and CalHFA both require a minimum credit score of 640, the option of alternative credit is not available. Alternative credit is established using payment histories from local utility companies, cell phone bill and other third party monthly obligations.
Finally, there may also be local options at the city and county level that may offer some assistance either in the form of a grant or a second lien to help pay for all or part of the required down payment and closing costs.
What is a tax credit as it relates to buying a home? It’s probably common knowledge that mortgage interest, while not a tax credit, is a tax deduction. Unlike rental payments, mortgage interest paid over the past year can be deducted from taxable income in most instances. However, a tax credit works in a different manner.
The most common of tax credits is called the Mortgage Credit Certificate, or MCC and is used in conjunction with a first mortgage or a first mortgage with subordinate financing. An MCC can help those obtain a slightly larger loan amount by taking the future mortgage interest deduction and applying it instead to the gross income. Instead of a deduction on an income tax form the income on the loan application in increased in a similar fashion.
The CalHFA MCC program is currently available to first time home buyers which again means you may not have owned a home within the previous three years and you need to meet any income or credit requirements set forth by the first mortgage. The MCC credit also asks that you occupy the property you are buying for the term of the loan, just as with other CalHFA programs.
How does the MCC work?
There are some basic requirements as well but they’re easily met. The home can’t be located on a property with more than five acres and the home must be a single family residence and can be located in a PUD. Condominium units are also acceptable properties for the program. It’s important to note that if taking the MCC credit it will affect the mortgage interest deduction on your tax returns when you file.
The HomeReady Option
As we mentioned early on in this article, this program was only recently released in December of 2015 so it’s relatively new. Relatively. In reality what Fannie Mae did was expand its’ “MyCommunity Mortgage” program, a program designed for Low-to-Moderate income borrowers.
The MyCommunity loan is no longer available in its old form and is now redesigned into HomeReady. According to Fannie Mae, these changes and updated guidelines were made in order to recognize a “…demographic sea change” in the housing market, characterized by the rise of the Millennials, increased diversity and a growing elderly population; and new household growth is being driving by traditionally underserved segments” and “Designed for creditworthy, low-to-moderate-income borrowers with expanded eligibility for financing homes in designated low-income, minority and disaster-impacted communities.”
It’s important to note at the outset the HomeReady program is a mortgage. It’s not a grant and is paid back just like any other mortgage loan. The exceptions are in the general guidelines which set it apart from the government-backed loans, second mortgages and cash grants explained in this article.
#1 Lower Down Payment and Lower Scores
HomeReady asks for a 3.00% down payment and can come from the borrower’s own funds but it doesn’t have to. HomeReady allows for the down payment and closing costs to be paid for by a financial gift, grant, a second mortgage and even cash-on-hand. Borrowers don’t even need to have an existing bank account, for example and credit scores can be as low as 620, a much easier threshold compared to the 640 mark.
#2 Higher Debt Ratios
HomeReady allows for extended debt-to-income ratios way beyond an FHA, VA, USDA, down payment assistance loans and grants. For example, while most down payment assistance programs require the debt to income ratio be at or below 45% of eligible borrower income, HomeReady allows a total debt ratio up to 50. With another twist, non-occupying borrowers are allowed to be on the loan application.
Previously unallowable income from rent can also be counted as qualifying income. HomeReady guidelines allow for rental income from third parties who rent a room or dwelling from the owner and boarder income. That means if someone is paying room and board the income may be used to help qualify. Conventional and government loans do not allow for such income to be used to help qualify.
#3 More Income
And speaking of income, income can be used from extended family or income from a non-borrowing household member can also be counted as qualifying income. This means everyone in the household who has a job can have the income counted as qualifying income.
#4 Reduced Mortgage Insurance
And just like government-backed loans and low down payment conventional mortgages there is a monthly mortgage insurance premium but with the HomeReady program this premium is reduced especially for eligible HomeReady borrowers. Mortgage rates for the HomeReady loan are also better when compared to other low-down payment conventional loan programs.
Borrowers no longer have to be first time homebuyers as with other programs helping low-to-moderate income borrowers as long as the borrowers occupy the property as a primary residence. The mortgage payment is made just like any other mortgage therefore there is no accrued interest due when the property is sold or the loan refinanced.
#5 No Income Limitations
If a property is located in a low-income census tract there are no income limitations whatsoever. If the property is located in a designated disaster area income can be as high as 100% of area median income. A disaster area is an area deemed so by FEMA. In a “high minority” area, one where minorities make up 30% of the population from the area, income is limited to 100% of the area median income and in all other areas qualifying income may not exceed 80% of the area’s median income. Borrowers must also complete a homeownership education program available online or with a HUD-approved housing counseling agency.
All standard loan products are available for the HomeReady loan program including fixed rate loans and adjustable rate hybrid mortgages in 3/1, 5/1, 7/1 and 10/1 options so borrowers can choose from a variety of loan programs that best fit their requirements.
When comparing this new HomeReady program with any other mortgage, down payment assistance loan or cash grant, it’s really hard to beat. Overall monthly payments are low and offer a range of mortgage options. Debt ratios are expanded to 50% and income can be used from previously unallowable sources and credit scores are relaxed.
Fannie has indeed recognized the changing face of our demographics and adjusted the old MyCommunity mortgage into the HomeReady program. It’s relatively new and not all lenders will be familiar with the program. In fact, it’s very possible that when you call a lender and ask for the program they may not know what you’re talking about and could very well start talking about a different loan program that’s not as competitive as HomeReady. Low down, relaxed credit and overall more generous qualifying guidelines are new features of program.
We’re sure you have plenty of questions and this program may not be for everyone but if you’re looking for a low down payment option then it’s worth picking up the phone and giving us a call and let us compare different financing options, including this new program. Who knows? You just might be ready for HomeReady!
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