What is the Freddie Mac Home Possible Loan?

lady handing over house keys with keychain.jpg

Do you have a low or moderate income, but still yearn to own your own home? Well, the Freddie Mac Home Possible Mortgage could be the perfect option. Designed specifically for low and moderate-income borrowers, the Home Possible Mortgage combines flexible credit score requirements with an incredibly low down payment requirement of just 3%.

What are the Terms and Requirements of the Freddie Mac Home Possible Loan?

As we just mentioned before, one of the biggest benefits of the Home Possible Mortgage is the fact that it offers up to 97% LTV for eligible borrowers. However, to be eligible for the 3% down/97% LTV program the property must be a single-family home or another one-unit property. Plus, while most borrowers still have to have a credit score of at least 660 in order to be eligible, borrowers without a credit score can use sources of nontraditional credit (think rent receipts, utility bills, etc.), and may still be eligible to put as little as 3% down. In addition, non-occupying co-borrowers can contribute to a borrower’s funds, but this allowance only applies to one-unit properties.

Both single family homes and 2-4 unit properties are eligible for the Home Possible program, but 2-4 unit properties are subject to slightly stricter requirements. For instance, borrowers who want to get a loan for a duplex, triplex, quadplex, or a manufactured home will need to put down at least 5%, for a maximum LTV ratio of 95%. In addition, credit score requirements for 2-4 unit multifamily properties are higher than for those for single-family homes, as borrowers must have a minimum 700 to be eligible. In order to get a Home Possible Mortgage for a manufactured home, a borrower needs to have an even higher score, at 720.

Borrowers typically must have a DTI of between 43% to 45%, but, in some cases, borrowers may be able to get away with DTIs of as high as 50-51%.

Home Possible Mortgages are offered as 15- to 30-year fixed-rate loans, 5/1, 5/5, 7/1, and 10/1 ARMs, as well as super conforming mortgages. For those who may not know, super conforming mortgages are a special category of Freddie Mac and Fannie Mae loan which allows borrowers to take out loans somewhat above the conforming loan limit in certain high-cost housing markets.

If all borrowers are first-time homeowners, at least one borrower is required to attend a homeownership education course.

How Does The Home Possible Loan Compare to Fannie Mae and FHA Loans?

Since we’ve gone pretty in depth about many of the aspects of the Freddie Mac Home Possible Mortgage, it wouldn’t be fair if we didn’t take some time to compare it to its most likely competitors: Fannie Mae and FHA loans.

When it comes to Fannie Mae loans, the Home Possible Mortgage’s most likely competitor is the Fannie Mae HomeReady mortgage. Like Home Possible loans, HomeReady loans are designed for borrowers with a low to moderate income. Also, like Home Possible loans, they permit eligible borrowers to put just 3% down on their loan. Just like other Fannie Mae loans, borrowers may have a credit score as low as 620, but will often be able to get a much better rate if their credit score is at least 680.

In addition, both HomeReady and Home Possible Mortgages allow borrowers to purchase 2-4 unit properties. However, HomeReady loans have much stricter LTV requirements than Home Possible loans, mandating a maximum 85% LTV for 2-unit properties and a maximum 75% LTV for 3-4 unit properties. Finally, also like the Home Possible Mortgage, HomeReady borrowers must earn no more than 100% of the area median income (AMI) in order to qualify. In certain low-income areas, there is no income requirement. Plus, in most cases, at least one HomeReady borrower must complete a homeowner’s education course in order to qualify.

When we look at FHA loans, the Home Possible Mortgage is most likely to be compared to the standard FHA 203(b) home purchase loan, which offers a minimum down payment of 3.5% for borrowers who have a credit score of at least 580. Unlike Home Possible and HomeReady loans, there are absolutely no income limits for 203b loans.

In general, all three types of loans (Freddie Mac, Fannie Mae, FHA) are relatively liberal when it comes to down payment gifts. This means that, in most cases, a borrower can actually get all of their down payment funds from an approved gift source. Approved sources include family members, friends, finances, or employers. Gift sources may not have any financial relationship with the real estate agent, real estate developer, lender/mortgage broker, or other interested parties. However, for some loans, such as Fannie Mae and Freddie Mac loans for 2-4 unit properties, borrowers must contribute at least 5% of the down payment.

Home Possible Mortgages Are Great for Some, But Not Everyone

While they have a variety of fantastic benefits, Home Possible Mortgages aren’t perfect for every borrower. For instance, borrowers in most areas must make no more than 100% of the area median income (AMI) in order to be eligible. However, in designated low-income areas, there is no maximum income requirement. In addition, to qualify for the Home Possible program, a borrower must be considered a first-time homeowner. However, this doesn’t mean that they’ve never owned a home before-- it simply means that they have not owned a residential property within the last 3 years.