The HomeReady™ loan is a Fannie Mae program, but the differences between the standard Fannie Mae programs and the HomeReady™ program are quite vast when you consider the income requirements. The HomeReady™ program was created in order to help borrowers that would qualify for a loan based on their credit history, but that do not have the income to bring their debt ratio down enough to qualify. Because of the unique aspect of this loan, the income requirements are vastly different.
Borrowers must Qualify with their Own Income
One thing that is obviously the same with standard Fannie Mae programs and the HomeReady™ program is that borrowers need to have income. You need to be able to qualify for the program with your own income, which means that you must qualify using your own salary, commission, or self-employment income. Where the program starts to differ is if the income from you and the co-borrower are not high enough to bring your debt ratio down low enough to qualify for the loan. If your debt ratio is between 45 and 50 percent, you are able to include non-borrower income in your loan profile. If your debt ratio exceeds 50 percent, however, you are unable to use additional income as a compensating factor as Fannie Mae considers that debt ratio too high to qualify for the loan.
Using Extended Household Income
Extended household income is money that any other household members bring into the household. Extended household income is also known as non-borrower income. This income is not used in the qualifying ratios or in the total income that is used to determine if you fall within the guidelines for your area regarding the average median income. This means that even if non-borrower income brought your income above the AMI for your county, you could still qualify. The only situations when the AMI matters, however, is if you purchase a home that is outside of a low-income or high-minority census tract, otherwise you do not have a maximum amount of income that is allowed.
Extended household income can come from relatives and non-relatives, as long as they live with you. The lender will determine if a person lives with you by having them sign Fannie Mae Form 1019, which signifies that the non-borrower plans to live with you for at least the next 12 months. This form also requires the non-borrower to provide supporting income documentation, much the same as you would have to do as the borrower. The non-borrowers need to provide any of the following to verify their income:
- Tax Returns
- Verification of Income from an employer
The income from the non-borrowers must total at least 30 percent of the qualifying income used, which is the total income from the borrower and co-borrower in order to be used.
The rental income able to be used on a HomeReady loan differs from rental income on any other loan program. With the HomeReady™ loan, you can use rental income from an accessory unit on your property. The only stipulations that are required include:
- The dwelling must be separate (such as a mother-in-law unit)
- The dwelling must have a separate kitchen and bathroom
This could also include a separate unit in the basement, as long as the kitchen and basement are present. If you collect rent from someone living in that unit, you can use it as a part of your qualifying income. You will have to prove that you have a lease for the next 12 months. Fannie Mae allows lenders to use 75% of the stated rent on the lease for qualifying purposes.
Another unique aspect of the receipt of income for the HomeReady loan™ is boarder income. This is income that you receive from a roommate type situation. This person needs to have lived with you in your current place of residence, even if you rented and then purchase a home. The rental history is what the lender needs to see. Some lenders can grant an exception to the rule if you only have a 9-month history of the boarder living with you. However, you should know that the lender will take the 9 months of rent and divide them among 12 months to get an annual rental income figure for qualification purposes. In order to prove the rental income that you received over the last year, you can provide canceled checks along with a rental agreement.
The HomeReady™ loan provides you with many opportunities to qualify for the loan even if you cannot qualify based on your own basic income. Rental and boarder income help your qualifying income, while extended household income helps your compensating factors. In order to use the EHI, however, your debt ratio must be between 45 and 50 percent in order to qualify.
If you have a unique situation with your income and plan to move into a low-income or high-minority area, the HomeReady™ program is a great way to get a loan. As long as you have good credit, typically above 620, you should consider this loan program as an option for your home ownership.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.