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Home Possible Loan Guide

Home Loans UPDATED ON May 3, 2017 BY Tony Mariotti
Home Possible Loan Guide

What Are Home Possible Mortgages?

Home Possible and Home Possible Advantage are two conventional loan programs created by Freddie Mac. They are affordable given their smaller 3% to 5% down payment requirement. The one that’s right for you will depend upon your income, the type property you wish to finance, and property location.

Home Possible mortgages are designed for low to moderate-income homebuyers and are well-suited for first-time home buyers and younger borrowers. These programs can help you go from renting to buying. You can finally paint the walls the color you want!

Home Possible Mortgage Requirements

Both the Home Possible and Home Possible Advantage programs help first-time home buyers. What’s more, neither program restricts “move-up” buyers. However, if you currently, you cannot have an ownership interest in any other residential property. For example, if you are a move-up buyer, you must sell your current home before taking on a Home Possible loan. Here’s some good news: you can close both the home you’re selling and the home you’re buying on the same day.

Both programs are used for purchases or refinances. In the case of refinances, no cash-outs are allowed. Refinances can only be used to change the interest rate or term, as would be the case when switching from a 30-year mortgage to a 15-year mortgage.

Any borrower who will be on the mortgage note, and are first-time homebuyers, must take a homeownership course, called CreditSmart, before the loan closing. The definition of a first-time homebuyer is a person with no ownership in residential property in the last three (3) years. The course is free and is available online or in-person. It takes a couple of hours to complete, and you can print out a certificate when you finish. The certificate goes into your loan file where it remains after closing.

Private Mortgage Insurance (PMI)

Your loan-to-value (LTV) is the amount you’ll owe, compared to the home’s value, after the loan closes. If you put down less than 20% (80 LTV) when you buy a home with a conventional mortgage program, you will need to carry private mortgage insurance (PMI). Mortgage insurance protects lenders in the case of a mortgage default. The mortgage insurance premium is calculated annually, based on the outstanding loan balance. The premium is divided up into 12 payments that get tacked onto your monthly mortgage payment.

Private mortgage insurance automatically cancels when your outstanding balance is 78% of the original loan amount, otherwise stated as a loan-to-value of 78. Even better, you can request the removal of mortgage insurance when the LTV reaches 80. This is one of the advantages of Home Possible mortgages over FHA loans. The only way to get out of FHA mortgage insurance is to refinance your loan.

Home Possible Income Limits

Because the Home Possible loan programs are designed for low to moderate-income borrowers, income limits apply. To be eligible for either mortgage program, your income cannot exceed the Area Median Income (AMI) where the property is located.

There are a few exceptions to the income limit guidelines. The first exception is in high-cost areas, as you’d find near big cities. In more expensive areas, higher incomes are allowed. For example, 140% of AMI will still qualify in some parts of California.

Second, there’s no borrower income limit in rural or underserved areas. The easiest way to determine your local income limits and property eligibility (e.g. underserved area) are to search using Freddie Mac’s income and property eligibility tool.

Given the income limits stipulated in the Home Possible guidelines, all borrower income must be documented, from all validated sources, even a salesperson’s commission, even if it’s not needed to qualify.

Freddie Mac guidelines also require stable monthly income for all borrowers who sign the mortgage note (not merely household income). Stable means a 2-year income history that is reasonably expected to continue.

Home Possible Down Payments

Many mortgage programs require that some of the down payment funds come from the borrower. Home Possible mortgages allow funds from a variety of sources to help you reach the 3% to 5% down requirement. You read that right: no out-of-pocket funds have to come from you. (Note: there’s one exception to this rule, covered in the Home Possible section below.)

Money used for your down payment can come from:

  • Family and friends
  • Affordable seconds programs (federal, state or municipal programs that provide down payment assistance)
  • Employee assistance programs

If family and friends help you with gift funds, you and your donors will need to sign a mortgage gift letter – a legal document that states all funds are truly a gift, not a temporary loan you’d pay back.

If you take money from your savings, checking or IRA accounts, you’ll also want to make sure you’re using seasoned funds (money that’s been in those accounts for at least 60 days).

Be sure that any funds you use, gifted or from your accounts, are traceable. Meaning, you’re not going to be able to use the money you’ve been storing in a jar, buried in your backyard. Funds need to have a traceable history from the source (e.g. recurring payroll direct deposits) and any transfers between financial institutions, like between banks.

Home Possible Loan Limits

Home Possible mortgages follow the same conforming loan limit guidelines used for all conventional mortgage programs.

Occupancy

All borrowers who sign the mortgage must occupy the home, and it must be their primary residence, not a second home or investment property.

Credit Scores

The minimum FICO score required for these programs varies by lender. Conventional loans typically require a score of 680 or better. However, the Home Possible programs are generally available with a minimum credit score of 620.

So far, we’ve covered the similarities between the two both Home Possible programs. Now let’s dig into the differences.

Home Possible Guidelines

About

Home Possible is a 5% down, conventional mortgage program (also known as 95 LTV).

Qualifying Ratios

Your “back-end” debt-to-income ratio (DTI) is monthly debt payments you’ll make (the proposed mortgage payment plus credit cards, student loans, auto loans, etc.) divided by your monthly income. DTI provides a measure for underwriters to determine the maximum loan amount for which you qualify. The Home Possible maximum DTI is 45.

Maximum LTV

  • Maximum LTV 95% for 1 to 4-unit properties

Property Eligibility

  • 1 to 4-unit primary residence
  • Manufactured homes OK with certain restrictions
  • No second homes
  • No investment properties

Terms Available

  • Fixed Rate Mortgages
  • 5/1 ARM (excluding manufactured homes)
  • 7/1 AM
  • 10/1 ARM

Down Payment Source of Funds

For nearly every type of property, borrowers do not have to use their personal funds for any portion of the down payment. The most common type of property people buy are one-unit, single family homes; those properties allow gifted funds. However, multi-unit properties have a few rules. Here are the minimum contribution requirements for a borrower’s personal funds:

  • 1 unit property: None
  • 2 to 4-units: None if the LTV is ≤ 80
  • 2 to 4-units: 3% if higher if the LTV is > 80 and ≤ 95
  • Manufactured homes: None

Reserves

The money that remains in your bank account, after completing a home purchase or refinance, is called reserves. The reserve requirements for Home Possible, by property type, are:

  • 1-unit: None
  • 2 to 4-units: 2 months’ worth of mortgage payments

 

Home Possible Advantage Guidelines

About

Home Possible Advantage is a similar, though slightly more restrictive, mortgage program.  The down payment requirement is smaller for this program, only 3% (also known as 97 LTV). But, it can only be used for one-unit properties.

Qualifying Ratios

The Home Possible Advantage maximum DTI is 43.

 Maximum LTV

  • Maximum LTV is 97 for 1-unit properties
  • Maximum Total Loan-to-Value (TLTV) is 105% when combined with secondary financing such as Affordable Second mortgage, like a state or local down payment assistance program. A Home Equity Line of Credit (HELOC) would not qualify as an acceptable second mortgage.

Property Eligibility

  • 1-unit only
  • Must be primary residence
  • Manufactured homes not allowed
  • No second homes
  • No investment properties

Terms Available

  • Fixed Rate Mortgages (FRMs) only
  • Mortgage term cannot exceed 30 years

Down Payment Source of Funds

Home Possible Advantage does not require a minimum contribution from the borrower’s personal funds. Meaning, 100% can come from a donor who is a family member, friend or an assistance program.

Reserves

For the Home Possible Advantage program, there is no reserves requirement.

How to Apply for Home Possible Mortgages

Applying for a loan is straightforward. You’ll need to gather a few documents before you start. Most of them will be available in a digital format, as PDF files, that you can send to your loan advisor (or upload to the online application form they provide). Here’s what you’ll need to get the ball rolling:

  • State issued ID, such as driver’s license or passport
  • Paycheck stubs for the most recent 30 days
  • W-2 forms from the past two years
  • Bank Accounts – recent statements from all accounts, all pages, even if blank
  • Tax returns – for the past two years
  • P&L Statement – year-to-date profit & loss statement if self-employed
  • Supplemental income – statement from retirement accounts, alimony, etc.

Home Possible FAQs

Are Home Possible mortgages for first-time home buyers only?

Nope! While both programs are designed to help first-time buyers, folks who’ve already owned a home can use either program. However, you cannot have simultaneous ownership interest in another property.

Will I need to carry mortgage insurance?

If the LTV is more than 80, you’ll need to carry private mortgage insurance. Premiums get added to your monthly mortgage payment and go away when the LTV reaches 78. You can request PMI removal when the LTV reaches 80.

Can I get a Home Possible loan if I’m self-employed?

Yes! You’ll need to provide tax returns, and possibly a year-to-date profit & loss statement, for the loan underwriter to review and verify.

Can I cash-out equity and refinance with a Home Possible loan?

Neither program supports cash-out refinances. These programs may only be used for home purchases.

How long does it take to get a Home Possible mortgage?

That depends on how fast you put together your pre-qualification documents and take the homeownership education course. If you get those two things out of the way before you apply, you can expect to close in 20 to 30 days under normal market conditions. Hot markets may affect how fast other parties to the transaction can get things done, like getting the property appraised.

Can I buy a condo or townhome?

Yep! Home Possible can be used for condos, townhomes and multi-unit properties. Home Possible Advantage can also be used for condos/townhomes but only for one-unit properties.

What’s the difference between Home Possible and Home Possible Advantage?

While very similar, each program is slightly different. The table below highlights how they vary.

Home PossibleHome Possible Advantage
Fixed Rate Mortgage30, 20, 15, 10-year FRM30, 20, 15, 10-year FRM
Adjustable Rate Mortgage5/1, 7/1 or 10/1 ARMNot permitted
LTV/TLTV/HTLVT9597/105
Loan PurposePurchase onlyPurchase only
OccupancyPrimary residencePrimary residence
Property Type1-4 Unit, PUD or Condo1-unit, PUD or Condo

WRITTEN BY

Tony Mariotti

Tony Mariotti

Tony Mariotti is the founder of RubyHome. In addition to helping folks get home loans, he is a sought-after blogger. His favorite topics are online marketing, real estate and mortgages.

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