January 24th, 2018 10:08 AM by Bob Rutledge
The 3% Down Alternative to FHA
It seems that a
lot of people think that Conventional financing requires a minimum down payment
of 20% or more.
I am shocked at
how many folks I speak to every day that think that a conventional loan is not
an option for buying a home with a low down payment.
Both Fannie Mae
and Freddie Mac, the conventional mortgages, have special loan programs
available that, based on your income, and/or the geographic region you are
buying in, allows you to buy with as little as 3% down payment.
Credit is Best
conventional loan programs they tend to favor better credit scores, through
their risk based pricing they punish borrowers with lower credit scores with
costs to the lender that increase interest rates if you are not perfect in the
eyes of Fannie or Freddie.
If you’re one
of those homebuyers, or homeowners that has excellent credit to decent credit,
but not a lot of equity or money for a down payment, you may be surprised at
conventional loan options offer.
HomeReady program is designed to meet the diverse needs of today’s buyers using
flexible underwriting guidelines for credit worthy low-to-moderate income
borrowers trying to finance a home.
Income from non-borrowing household members can be considered as
a compensating factor to allow debt to income ratio greater than 45%, up to
Can use income from rental unit and boarder income for
Allows non-occupying borrowers, like a parent, to help meet debt
to income requirements.
Financing up to 97% loan to value for the purchase of a one-unit
Financing up to 95% loan to value for limited cash out
refinances, or 97% loan to value if mortgage being refinanced is owned or
guaranteed by Fannie Mae.
You are NOT required to be a first time home buyer to qualify
for this program
Private mortgage insurance is discounted, in many cases below
that of FHA and a regular conventional mortgage.
Gifts, grants, community seconds, and cash-on-hand can be used
as a source of funds for down payment and closing costs.
Nontraditional credit is allowed. An example is rental
history, or utility and insurance payments.
Requirements for HomeReady
HomeReady are required to meet certain criteria that are not necessarily
required if you’re using a traditional conventional loan with a maximum loan to
value of 95% (5% down payment for purchase).
Education Requirement – A homeownership education course may be required unless you
have previously taken a course required by a community seconds program, or if
you’ve completed a course from a recent attempt to purchase another home.
Eligibility – HomeReady is available to any homebuyer or homeowner that
meets the income limits of the property location. The income limits may
be waived if the property is located in a “targeted” low-to-moderate income
You can look up
the income and property eligibility by entering the address of the home you’re
interested in into Fannie Mae’s
Eligibility Search Tool Here
Home Possible Mortgages
Home Possible mortgage offer low down payments for low-to-moderate income
homebuyers, or buyers in high-cost or underserved communities.
offers two different low down payment options, Home Possible 95% Loan to Value,
and Home Possible Advantage 97% Loan to Value. I will only address the 97% or
3% down payment option.
Maximum loan to value 97%. Minimum 3% down payment for
1-unit single family unit homes, condominiums, and planned unit
developments are eligible.
Flexible sources of down payment. Down payment can come
from a variety of sources, including friends and family, employer-assistance
programs and secondary financing.
No cash-out refinancing is available up to 97% loan to value for
borrowers who occupy the property.
Income flexibility. Borrowers with income above the area
median income (AMI) may be eligible in high-cost areas. No income limits
in underserved areas.
You can check eligibility by using Freddie Mac’s Home Possible
Income & Property Eligibility Tool Here.
Private mortgage insurance is discounted, in many cases the
monthly mortgage insurance is well below that of a regular conventional
mortgage and below that of FHA
All borrowers must live in the property. Non-occupying
borrowers not allowed at 97% loan to value.
How Do I Choose
The Best Option?
There is very
little to no difference between the costs and interest rates of these two programs,
so it comes down to your financial situation that may determine which option is
best for you. In a sense, the best option chooses you.
or Home Possible should all be considered for many home buyers that in the past
were placed only in a FHA mortgage. What use to be has changed, if yesterday
you were a FHA mortgage today you may have a better option
example is if you have student loans with Income Based Repayment (IBR) payments.
FHA, Freddie Mac, and Fannie Mae all handle this situation differently.
is that the targeted income and property lookup tools offer different results.
If you look up a property using Fannie Mae’s HomeReady lookup tool, you
may make too much income to qualify, whereas if you look up the same property
using Freddie Mac’s Home Possible lookup tool, you may qualify. FHA does not
have a maximum income limitation.
If you are
considering a new home purchase and want a low down payment option you need to
consider a mortgage lender that has experience with FHA, Home Possible, and
HomeReady, and is willing to consider all possible options for you.
If you want to
talk with me about what options are available to you please contact me, Bob
Rutledge, at 314-628-2218 or email me at email@example.com