The Fannie Mae HomeReady® loan is a mortgage program that helps low- to moderate-income borrowers achieve homeownership. Compared to traditional conventional loans, HomeReady® loans offer reduced mortgage insurance and a down payment requirement of only 3%.
If you’re looking for an affordable mortgage option with lenient income requirements and lower upfront costs, HomeReady® might be a great fit. However, it's important to understand the pros and cons and how they work before deciding.
How HomeReady® Loans Work
HomeReady® loans are not issued directly by Fannie Mae. Instead, they are offered by approved mortgage lenders, such as:
- Banks
- Credit Unions
- Mortgage Lenders & Brokers
- Online Lenders
These lenders originate and process the loans, while Fannie Mae purchases them from the lender after closing. Because different lenders may have slightly different qualification standards and interest rates, compare multiple lenders to find the best terms.
Available Loan Terms & Options
HomeReady® loans offer flexible loan term options, similar to traditional conventional loans. You can choose from:
- Fixed-Rate Mortgages: 10, 15, 20, or 30 years*
- Adjustable-Rate Mortgages (ARMs): 5/1, 7/1, and 10/1 ARMs, where the interest rate adjusts after a fixed period
*Neighbors Bank typically only offers HomeReady® mortgages in 30-year terms.
Most borrowers opt for a 30-year fixed mortgage for predictable payments and long-term affordability. However, shorter-term loans can result in lower interest rates and less total interest paid.
FNMA HomeReady® Income Limits
One key requirement of the HomeReady® loan is that borrowers must not exceed the income limits set by Fannie Mae. These limits vary based on the property’s location and are determined using the area median income (AMI).
- General Rule: Borrowers must earn 80% or less of the AMI for the area where they are purchasing a home.
- Finding Your Income Limit: You can check your eligibility using Fannie Mae’s Income Lookup Tool.
Because income limits are based on location, HomeReady® loans tend to benefit buyers in lower-cost areas more than those in high-income metro areas.
HomeReady® Pros & Cons
Like any mortgage, HomeReady® has advantages and drawbacks.
Advantages
✅ Low Down Payment of 3%
Compared to the 5% or more required by standard conventional loans.
✅ Reduced Mortgage Insurance
Reduced PMI for LTV above 90% and allows for PMI cancellation once you reach 20% equity.
✅ Flexible Income Sources
Allows borrowers to count income from co-borrowers, rental income, or even boarders to qualify.
✅ Lower Credit Score Requirement
Requires a minimum credit score of 620, which is more forgiving than some conventional options.
✅ More Competitive Rates
HomeReady® loans tend to offer better interest rates than other low-down-payment loans.
✅ Down Payment Assistance Availability
Can be used alongside down payment and closing cost assistance programs.
Disadvantages
❌ Income Limits Apply
Borrowers must meet Fannie Mae’s income limits, which can’t exceed 80% of the area’s median income where you are buying.
❌ Homeownership Education Course Required for FTHB
First-time buyers must complete a free online homeownership course before closing.
❌ Limited to Primary Residences
Borrowers cannot use HomeReady® for investment properties or vacation homes. However, it can fund multi-unit homes, so you can live in one unit and rent the other units out.
How to Qualify for a HomeReady® Loan
To qualify for a HomeReady® mortgage, you’ll need to meet Fannie Mae’s eligibility guidelines, which include:
- Minimum credit score of 620 (higher scores may qualify for better rates)
- At least a 3% down payment
- Not too high of a debt-to-income ratio
- Income not exceeding 80% of the area’s median income
- The home must be your primary residence.
Do you have to be a first-time homebuyer to qualify?
No, you do not have to be a first-time homebuyer to qualify for a HomeReady® loan. This program is available to both first-time and repeat homebuyers as long as you meet income and credit requirements.
However, first-time homebuyers are required to complete an approved homeownership education course before closing. This course, often available online, helps borrowers understand the homebuying process and mortgage responsibilities.
If you have owned a home within the past three years, you are not considered a first-time homebuyer and can skip the education requirement.
FHA Loans Are a Popular Alternative to HomeReady® Loans
If you don’t qualify for HomeReady® due to the income limits, you may be eligible for an FHA loan, a similar mortgage option for first-time homebuyers and those with limited down payment funds.
Let’s take a look at how the two options compare:
HomeReady® vs. FHA Loan
| Feature | HomeReady® Loan | FHA Loan |
|---|---|---|
| Down Payment | 3% | 3.5% |
| Credit Score | 620+ | 580+ (sometimes lower) |
| Mortgage Insurance | PMI (cancelable) | MIP (required for life if <10% down) |
| Income Limits | Yes (80% of AMI) | No income limits |
| Debt-to-Income Ratio | Flexible | Flexible |
| Property Type | Primary residence only | Primary residence only |
One major difference is that FHA loans do not have income limits, making them more accessible for borrowers in higher-income areas. However, FHA loans require mortgage insurance for the life of the loan if you put less than 10% down, whereas HomeReady® loans allow you to cancel PMI once you reach 20% equity.
If you’re deciding between HomeReady® and FHA, consider factors like income eligibility, credit score, and long-term cost savings.
Is a HomeReady® loan right for you?
The Fannie Mae HomeReady® loan is a strong mortgage option for low- to moderate-income borrowers who qualify based on income and credit score. With low down payment requirements, reduced mortgage insurance, and flexible income guidelines, it can be an excellent choice for buyers who need an affordable and accessible path to homeownership.
Article Sources
With over 11 years in the mortgage industry, Matt Roy has spent the last 7 years as an underwriter. He’s passionate about understanding the “why” behind lending decisions and helping homebuyers succeed.
