For thousands of people across the country who thought they would never qualify for a mortgage, next month could be a key turning point.
On Dec. 12, giant investor Fannie Mae goes live with its new HomeReady program, which is aimed at creditworthy buyers who need extra flexibility on debt-to-income ratios, down-payment cash and the sources of the funds they intend to use for ongoing monthly payments.
Say that you’ve been living at your parents’ home or in a rental with a partner and that you’ve got student debts and haven’t saved much for a down payment. Or you need a house that will allow some close relatives to live with you and contribute toward the monthly mortgage payment. Or you need to be able to count the money you receive from a boarder who rents a room in the house as part of your monthly income — which, of course, it is.
Under conventional mortgage guidelines, you’ve got some serious hurdles. For starters, your debt-to-income ratio — a crucial element in mortgage underwriting — may be viewed as too high by most banks because they want to count only the income of you and your spouse or partner, who are listed as borrowers on the note. Even if you explain that your income-earning brother, parents or kids who would also live in the house can contribute reliably toward monthly payments, banks won’t count that income.
Enter the HomeReady program, which Fannie Mae describes as supporting “homeownership for the way we live today.”
Household economics and income patterns in 2015 can be complicated, especially among immigrant and minority families. Nationwide, according to Fannie Mae researchers, 14 percent of all households with mortgages have some form of extended-family living arrangements. Twenty-five percent of Hispanics with mortgages have multi-generational, extended family members in the home, as do 20 percent of African Americans and 17 percent of Asians.
To help bridge the gap for such folks — along with myriad others who have moderate incomes and scant savings but who represent solid credit risks — HomeReady offers the following:
●Down payments as low as 3 percent.
●No minimum contribution from you — the borrower — toward the down payment on a single-family home purchase. You can supplement your own cash with gifts from relatives.
●You can add the income of one or more resident household members into total household mortgage income for calculating the debt-to-income ratios. These will be “non-borrowers,” in Fannie Mae terms — contributors to income but not legal co-borrowers with responsibility for the debt. Under some circumstances where non-borrowers in the household have significant incomes, Fannie may waive its standard debt-to-income ratio limit and consider applications where debt ratios go as high as 50 percent of household income. Total debts include not only the mortgage but also payments for auto loans, credit cards, student loans and the like.
●To add further to income for the purposes of the mortgage, you may be able to bring in “non-occupants” who are helping you make your payments but don’t plan to live in the house. These might be parents, grandparents, siblings or others. (When non-occupants are part of the picture, however, the minimum required down payment jumps to 5 percent.) The program also allows you to count income from in-house boarders — maybe someone who rents a room or an accessory dwelling or apartment.
In exchange for these underwriting breaks, Fannie has two important requirements: Since this is a program primarily designed to open credit doors for people with moderate incomes, there are limits. If the property you want to purchase is located in one of roughly half of all census tracts, you can’t have income in excess of the area median. In other census tracts designated as “low income,” there are no income restrictions. In “high minority” census tracts, your qualifying income can’t exceed 100 percent of the area median. (You can check census tract designations by state at www.fanniemae.com/singlefamily/homeready-income-eligibility-maps.)
Fannie Mae also expects everybody who qualifies for HomeReady to complete an online home-purchase education course lasting roughly four to six hours.
If HomeReady sounds like a fit for your situation, what should you do? Contact multiple lenders to see whether and when they expect to offer the program. Even though Fannie’s automated underwriting system won’t be evaluating applications until Dec. 12, interested lenders can work with you now to get your application ready for the start date.
Ken Harney’s e-mail address is firstname.lastname@example.org.