Coming up with the down payment is the biggest obstacle homebuyers face when getting a mortgage.
Luckily, there are some home loans that offer low down payments.
One of those loan programs is Freddie Mac’s Home Possible loan that requires just 3% down.
In this article, we will take a closer look at the Home Possible loan program so you can decide if it’s a good fit for you.
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What is a Home Possible Loan?
Freddie Mac created the Home Possible and Home Possible Advantage programs to help low-to-median income borrowers become homeowners with a low down payment of 3%. The program is similar to the HomeReady loan program by Fannie Mae.
A 5% – 20% down payment is usually required for a conventional loan which makes them more difficult to attain, especially for first-time homebuyers without significant savings.
By offering home loans that finance 97% of the loan-to-value ratio allows Freddie Mac is able to compete with the FHA loan program, which requires a 3.5% down payment.
Home Possible Loan Requirements
- 640 credit score
- 3% down payment
- 50% maximum debt-to-income ratio
- Income limit 80% of area median income
- Primary Residence only
- Two years of stable employment
- Proof of income (W2’s, tax returns)
Home Possible Benefits
- 3% down payment
- Low interest rate
- Use alternate income sources
- Fixed monthly mortgage payments
- Low PMI rates
- PMI can be canceled at 80% LTV
Home Possible Eligibility Guidelines
Income – The Home Possible mortgage program is specifically designed for low-income borrowers with a household income limit of 80% of the median income in the area. You can view income and property eligibility on Freddie Mac’s website.
Down Payment – 3% down payment. Unlike other types of mortgage loans, the down payment for Home Possible loans can come from a variety of sources, including family, sweat equity, employer-assistance programs, and secondary financing.
Debt-to-Income – Your debt-to-income (DTI) ratio is the percentage of your monthly income that does towards reoccurring monthly bills such as auto loans, credit cards, and a mortgage. The maximum DTI ratio allowed in the Home Possible program is 50%.
Credit – 620 minimum credit score requirement. However, mortgage lenders look at more than just your credit score, late payments, collection accounts, and outstanding debt are factors that are used to determine eligibility.
Property types – Owner-occupied primary residences, 1-4 unit properties, planned unit developments, Condos, and manufactured homes are all eligible.
Home Possible Loans vs. FHA Loans
While FHA and Home Possible loans both share a low down payment, that’s where the similarities end. FHA loans are backed by the government and require a mortgage insurance premium (MIP). Home Possible is a conventional 97 loan that is backed by private mortgage insurance (PMI) companies.
FHA loans have the lowest credit score requirement the country allowing for scores as low as 500 with a 10% down payment, or 3.5% down with a 580 score. To qualify for a Home Possible loan you will need a minimum 620 credit score.
Key differences between Home Possible & FHA
- Down payment requirements – Outside of no down payment home loans such as USDA and VA loans. The Home Possible mortgage has a slightly lower down payment requirement than the 3.5% that is needed for an FHA mortgage.
- Credit score – An FHA loan is ideal for a borrower with bad credit because of their low credit score requirement of just 500 with 10% down, or 580 with 3.5% down. Home Possible loans require a minimum credit score of 620.
- Income limits – Home Possible loans are for low-income borrowers only. Your income cannot exceed 80% of the area median income (AMI). FHA loans do not have income limits.
- Income verification – Home Possible allows for use of non-borrowers income and rental income to be considered. . FHA loans will only consider income from borrowers and co-borrowers who are on the loan application.
- Mortgage insurance – FHA does have a one-time upfront MIP fee of 1.75% of the loan amount, Home Possible does not have upfront mortgage insurance costs. Both Home Possible and FHA loans require mortgage insurance which is added to the monthly payments. However, if you’re putting less than 10% down with an FHA mortgage you will have MIP payments for the life of the loan, or until you refinance into a conventional mortgage. With Home Possible, PMI is only needed until the LTV ratio reaches 80%.
FHA Loan | Home Possible Loan | |
Down Payment | 580 with 3.5% down500 with 10% down | 3% |
Minimum Credit Score | 500-580 | 620 |
Income Limits | No income limit | 80% of area median incomeVaries by county |
Mortgage Insurance | Up-front MIP paymentMonthly MIP payments* >10% down MIP cancels in 11 yrs* <10% down MIP required for the life of the loan | Monthly PMI payments* PMI is canceled when LTV ratio reaches 78% |
Income Sources | Only applicant's income can be used | Can use income from parents, renters, or anyone else living in the home |
Maximum LTV Limits | 96.5% | 97% LTV, 105% TLTV with Affordable Seconds, and 97% HTLTV for 1-unit properties. |
Homebuyer Education | Not required | 4-6 hours of homeownership education coursesCost: $75 |
How to Apply
The Home Possible loan product is available from most mortgage lenders. Because of the restrictions on income it is very important to get pre-approved before you start searching for a new home.
Contact a mortgage lender that offers Home Possible loans and complete a loan application with a loan officer.
Required for Pre-Approval
- Credit check
- Drivers license
- Two years of tax returns and W2’s
- Recent pay stubs
Ready to see if you qualify?
