HomeReady™ loans make it possible for a large variety of people to obtain Fannie Mae financing that would otherwise be ineligible for the program. The program focuses on borrowers that have excellent credit, but have other issues that would otherwise prevent them from obtaining the loan. Typically, this means a higher than allowed debt ratio. In order to make up for this fact, the HomeReady™ program enables you to use the income of anyone that lives in the home, including children, parents, and other relatives. You can even use boarder income in certain situations. However, one of the hardest issues to deal with on the HomeReady™ loan or any loan, for that matter, is coming up with the down payment. HomeReady™ loans require a 3% down payment, which for low income borrowers, can be hard to come up with, which is why the limits on seller contributions are relaxed on this program.
Seller Contributions are Allowed
Another benefit of this program is that seller contributions are allowed, as long as the money they provide strictly covers the closing costs and nothing above those costs. There are maximum seller contribution amounts allowable, based on your LTV and property type. Seller contribution limits can range from 2%-9% depending on your loan scenario.
How Seller Concessions Work
If the seller agrees to pay all or a part of your closing fees, including the origination, discount, recording, title, appraisal, and processing fees, the sales price of the home will be increased. This is done after you agree on an actual sales price for the home. Once that is agreed upon, the lender will give you a closing cost price, which you can then negotiate with the seller. The seller can decide to pay all or a part of the closing costs. Whatever amount is agreed upon, you and the seller agree to raise the sales price of the home accordingly. The money in excess of the actual sales price determined is what gets used towards the closing costs. One important factor regarding seller concessions, however, is that the home needs to appraise high enough for the seller concessions to be included. Because the maximum LTV on the HomeReady™ loan is 97%, your appraisal needs to come back accordingly.
Borrowers do not Need to Contribute
One of the unique aspects of HomeReady™ loans is that you do not need to put any of your own funds towards the loan. Most mortgage programs require at least a small portion of the funds to be provided by the borrower, but the HomeReady™ loan does not require that. This means that the down payment funds can come from someone other than yourself and the closing costs can come from the seller.
The exact requirements for the HomeReady™ loans regarding borrower contributions are as follows:
- If the LTV is 80 percent or less, there is no minimum requirement for borrower funds on the down payment. This is for any type of unit from 1 to 4 units.
- If the LTV is more than 80 percent, there is still no minimum requirement for borrower funds for the down payment, but this is in regards to a one unit property only. On 2 to 4-unit properties, you must contribute at least 5% of the funds towards the loan.
Documenting Gift Money
If you do receive gift money towards your HomeReady™ loan, you need to document it accordingly. This means proving that the money is truly a gift, and not a loan that is expected to be repaid. If it is a loan, the lender would have to figure the payments into your debt ratio to determine if you qualify for the loan with the new debt included.
The formal way to document gift money requires the donor to provide a gift letter. The letter must include information such as the amount of the gift being provided, the date they provided the funds, and a statement showing the lender that it is a gift and that there are no repayment terms. In addition, the lender must validate the following:
- The fact that the donor has the available funds in his checking or savings account
- Proof of the transfer of the funds from the donor’s account to the borrower’s account
- A copy of the canceled check
The HomeReady™ loan provides borrowers with plenty of flexibility, not just with their income, but with the down payment and closing costs as well. Being able to use the income of household members as well as the money from sellers in the form of sellers’ concessions makes the HomeReady™ loan one of the most affordable loans on the market. If you have excellent credit, yet your debt ratio is outside of the standard requirements to qualify for a QM loan, the HomeReady™ loan is a great way to get the funding you need.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.