If you don’t have a large down payment for a home, you might think you are out of luck. While the FHA offers a 3.5% down payment loan, Fannie Mae and Freddie Mac also have options. Fannie Mae offers the HomeReady loan and Freddie Mac has the Home Possible loan. While both are similar, they have some differences you should understand in order to make a decision.
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Fannie Mae HomeReady Loan
The Fannie Mae HomeReady loan is a conventional loan program. You don’t pay funding fees and you can cancel the PMI after you owe less than 80% of the home’s value. Other things you should know about this loan include:
- You’ll need to put at least 3% down on the home if it is a multi-unit property
- You don’t need any money down if it’s a single unit property
- The income of all adult household members counts as a compensating factor (they don’t have to be on the loan)
- You can include potential rental income if you purchase a multi-unit property and live in one unit yourself
- The minimum credit score is 620, but many lenders require at least a 680 score
- You can’t make more than 80% of the median income for your area
- You must take the necessary homebuyer courses
- All borrowers on the loan must occupy the home
Freddie Mac Home Possible Loan
The Freddie Mac Home Possible Loan is another conventional option. With this program, you do not need a down payment; you can borrow 100% of the home’s purchase price. Just like the Fannie Mae product, you must live in the property though.
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A major difference with the Home Possible loan is the ability to include all adult household income in the qualifying factors. Freddie mac only considers the income of the borrowers on the loan. If your debt ratio is close and you can’t use other household members’ income, it could hurt your chances of approval.
Luckily, the Freddie Mac program does allow the use of boarder income. If you purchase a multiple unit property and live in one unit, you can use the rent received from the other units as a part of your qualifying income.
Another benefit of the Freddie Mac loan is the owner occupancy requirements. While at least one borrower must live in the home, not every borrower must live there. The caveat is, however, that you must not have an LTV greater than 95% in order to use this benefit.
A major difference with the Freddie Mac program is the need of homebuyer education. If you already owned a home before, you do not need to take any courses. If you are a first-time homebuyer, though, you will need to do so.
What Should You Do?
The decision comes down to what you need. For example, look at your assets. Do you have money to put down on the home? If you do, then the Fannie Mae HomeReady loan might be a good option. If you don’t have the funds, though, the Freddie Mac loan will suit you better.
Other factors to consider include:
- Will all borrowers live in the home? If so, the Fannie Mae loan will work. If not, you’ll need the Freddie Mac option.
- Do you need the income of other household members to qualify? If so, you’ll need the HomeReady option.
Answering these questions and really exploring your options will help you decide which loan is right for you. They are both conventional loans that both require PMI for LTVs over 80%. However, you can cancel the PMI once you pay the principal balance down or when the home appreciates.
Both the HomeReady and Home Possible give you the chance to own a home with very little money down and with a low interest rate.
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