HomeReady is the newest home loan program offering from Fannie Mae and can save Orange County home buyers money. It’s designed to provide financing to creditworthy lower income borrowers in minority and low-income neighborhoods. It provides several benefits to borrowers like a reduced down payment, lower Loan Level Pricing Adjustments (LLPA’s), and reduced monthly Private Mortgage Insurance (PMI) premiums. Loans made through HomeReady can also be potentially refinanced up to 97% of the loan value.
Eligibility for the HomeReady Loan Program
There are some basic eligibility requirements for the HomeReady program, but for those that are eligible HomeReady offers quite a bit of flexibility in getting your loan application approved. HomeReady does not allow the borrower to own another home at the time of the new loan, but not require the borrower to be a first time buyer. That’s right, this program not not restricted to only first time buyers. An online Home Buyer Education course is required to be completed prior to closing. One of the coolest things about the HomeReady program is that it allows unconventional ways to establish a credit history. So for an Orange County home buyer with limited to no credit, providing alternative credit ( for example submitting proof of making a utility bill on time for 12 months) can be used in place of not having credit on the credit report. HomeReady also allows for the pooling of income from family members to help qualify the loan. Income limits still need to be met.
Down Payment Requirement for HomeReady Home Loan Program
The down payment requirement with HomeReady is lower compared to other loan programs (other than the VA loan Program. Orange County Veterans should use the VA loan) and also allows for more flexibility in where the down payment comes from. For loans less than $417,000 a down payment of only 3% is required. For loans between $417,001 and $625,500 only a 5% down payment is required. HomeReady actually allows for the down payment and closing costs to be paid by relatives (in the form of a “gift). This means there is not “minimum” contribution requirement from the buyer.
HomeReady Income Eligibility Requirements for Orange County, CA
The best thing to do to see if you are eligible for the HomeReady Program is to call an Orange County loan officer knowledgeable with HomeReady. There are income requirements that need to be met depending on the location of the property. You can either have annual income that is equal to or less than 80% of the Area Median Income (AMI), 100% of the AMI, or if buying in certain designated Census Tracts, then no income limit is required. Using the Income Eligibility Lookup Tool you will be able to enter the address of the property and find out what the eligibility requirements are for that property. The AMI in Orange County is $67,900 in 2016. There are some census tracts that allow for the buyer to have income up to 100% of the $67,900, and some census tracts that require income at 80% of the AMI, or $54,320 in Orange County. But you will also find that some properties have no income limitation. It is worth it to check for eligibility. It only takes a minute and can save thousands of dollars for those that qualify.
LLPA’s and Mortgage Insurance for the HomeReady Program
Besides the fact that only 3% down payment is required for a HomeReady loan under $417,000 and 5% for loans from $417,001 to $625,500, the real savings for the Orange County home buyer (or refinancer since this program is not only for purchases) comes from the capped LLPA’s and the lower mortgage insurance premiums when compared to other Conventional loan programs. For FICO scores above 680 there are NO LLPA’s (again, LLPA’s are Loan Level Pricing Adjustments). LLPA’s are required pricing add-on’s on Conventional loans. For example, when a home buyer is purchasing a condo with less than 25% down payment, Fannie Mae has a .75 pricing hit. The pricing hit essentially pushes the interest rate higher. A .75 pricing hit can lead to an interest rate adjustment of between .125% and .25%. For someone with a 680 FICO score purchasing a condo in Orange County, the interest rate difference between the standard Fannie Mae 30 year fixed pricing and a HomeReady 30 year fixed can be between .375% and .5% in rate. On a $400,000 loan that would be approximately an $84 payment difference. The reduced PMI would add to the savings, putting the total payment difference closer to $120 or more per month.
Another important factor when comparing the HomeReady program FHA is that the PMI on the HomeReady program is cancelable if the buyers equity position improves (after certain time requirements). FHA mortgage insurance remains on the loan for life. The only way to get out of FHA mortgage insurance is to refinance out the the FHA loan. For someone who is concerned that interest rates will be higher in the future, being able to stay in your loan and still eliminate the PMI makes the HomeReady program a winner.
To find out if you qualify for the HomeReady program, working with a Loan Officer who is familiar with the program and will take the time to lookup the property you wish to finance for eligibility could lead for big savings over the life of the loan. It is definitely worth it to check out this program.
Authored by Tim Storm, an Orange County, CA Loan Officer. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.OCHomeBuyerLoans.com. I will prepare custom loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.