The HomeReady™ loan gives borrowers a chance to become a homeowner that would otherwise be unable to get approved for a conventional loan. This Fannie Mae program provides loans for borrowers that live in low income and high minority census tracts.
The key difference with this program is that it allows various types of income to help you qualify for the loan. You are not restricted strictly to the borrower and co-borrower’s income – you have the freedom to use extended family members’ income if they live with you and in some cases, you can even use boarder income for qualifying purposes. That being said, there are specific restrictions that you must abide by in order to qualify.
Let’s find out how Fannie Mae HomeReady™ income limits work. Unlike other loan programs, you can actually make too much money for this program, which would render you ineligible.
HomeReady™ Income Limits by Area
The amount of income you are allowed to make in order to qualify for the HomeReady™ loan depends on the area that you live. In any area, you are not able to make more than 100% of the average median income for that area in order to qualify if the home is not located in a low-income census tract. If it is located within a low-income area, there is no limit to the amount of income you can make.
The HomeReady™ income limits are determined by the county that the home you plan to purchase resides. Fannie Mae has a very simple tool called the HomeReady™ Income Eligibility Lookup Tool, which allows you to enter the street address to get the exact amount of income you are allowed to make.
How is Income Determined?
The income from the borrower and co-borrower are included in the qualifying income. These two incomes cannot total more than 100% for the area if you wish to move into any area that is not considered a low-income area. The typical income used for qualifying purposes includes:
- Standard salary or hourly pay
- Overtime income
- Bonus income
- Self-employment income
- Disability income
- Social Security income
- Any other income that you receive on a regular basis
If this income does not bring your debt ratio below 50%, you can use the income from extended family members to help you bring your debt ratio down. Keep in mind that the extended family income cannot be used for qualifying purposes up front, but if you need a compensating factor, you can use the income of family members that live with you in much the same way you can use your own income.
In order to qualify for a HomeReady™ loan, however, you have to meet the following requirements:
- The income that extended family members provide must be at least 30 percent of the total income in order to be considered
- The extended family members must be able to verify their income with formal documents, such as W-2s and tax returns
- The extra income can come from anyone that lives with you now and signs an agreement that they plan to live with you for the next 12 months
What is Boarder Income?
Another type of income you can use for the HomeReady™ loan is boarder income. This is money you receive from someone on a monthly basis that rents a room from you. This is not a renter as the boarder shares all common areas of the home with you, such as the bathrooms and the kitchen.
In order to use boarder income to qualify, the boarder must have lived with you during the last 12 months and there must be a signed and executed lease agreement so the lender can determine how much money you will receive on a monthly basis.
What is Rental Income?
If you have a separate accessory unit in the home, such as a basement apartment or separate home in the back of your home, you can rent it out. In order to use rental income as a part of your qualifying income. However, you have to have proof of a rental agreement for the last 12 months from the renter, including proof of the canceled checks to ensure that you received the money on time.
This gives the lender some history and proof that the renter is legitimate and pays on time in order to use this income as a part of your qualifying income.
Debt Ratio Eligibility for the HomeReady™ Loan
The key factor for the HomeReady™ loan is what the debt ratio is, as that is what determines what you qualify to receive.
If your debt ratio exceeds 50 percent with just your borrower and co-borrower income, you are not eligible for the loan at all. On the other hand, if the debt ratio is between 45 and 50 percent even after any boarder or rental income, you can use the non-borrower income to help give you compensating factors. Your debt ratio will remain the same, but the extra income will give the lender the reassurance they need in order to approve you for the loan, especially if you have a high level of income.
The Fannie Mae HomeReady™ loan is among the most flexible loans offered by Fannie Mae. It enables you to purchase a home with others that will not be on the loan. However, you have to keep in mind that you have to have great credit and a debt ratio between 45 and 50 percent.
If you meet those guidelines, you have a variety of ways to get yourself approved for this loan, especially if you purchase in a low-income census tract, as you have no maximum amount of income that you are limited to, which means you can use non-borrower income to help your situation look better. The HomeReady™ loan gives you the benefit of owning a home and taking out a conventional loan even if you would not qualify for a standard Fannie Mae loan.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.