B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements (06/05/2024)

HomeReady mortgage loans can be underwritten with DU or may be manually underwritten. The maximum LTV ratio is lower for manually underwritten transactions versus those underwritten in DU (95% versus 97% for one-unit principal residences). As a reminder, the limited waiver of representations and warranties typically granted for loans underwritten with DU does not apply to manually underwritten loans.

For HomeReady mortgage loans that are underwritten through DU, the lender must enter data in the online loan application, identify the loan as a community lending mortgage, and select the HomeReady product.

If the lender does not select HomeReady as the community lending product, DU will provide a message when the total qualifying income entered in DU appears to be within the applicable AMI limits for the property’s location. The lender must then select the HomeReady product and resubmit the loan casefile to help determine if the loan meets all of the HomeReady requirements (assuming the lender wants to sell the loan to Fannie Mae as a HomeReady mortgage).

The following table describes the minimum borrower contribution requirements (excluding loans with grants).

Note: If a grant or lender-funded grant is being provided, see  B3-4.3-06, Grants and Lender ContributionsB3-4.3-06, Grants and Lender Contributions  for additional borrower contribution requirements.

No minimum contribution is required in connection with a limited cash-out refinance transaction.

Non-occupant borrowers are permitted on HomeReady mortgages. See B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject TransactionB2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction, for the eligibility requirements that apply.

Rental income is an acceptable source of qualifying income in the following instances:

• one-unit principal residence with an accessory unit. See B4-1.3-05, Improvements Section of the Appraisal ReportB4-1.3-05, Improvements Section of the Appraisal Report, for additional details related to acceptable accessory units;

• two- to four-unit principal residence properties.

See  B3-3.1-08, Rental IncomeB3-3.1-08, Rental Income, for calculation and documentation of rental income used for qualifying purposes.

The rental payments that any borrower receives from one or more individuals who reside with the borrower (who may or may not be related to the borrower) may be considered as acceptable stable income. This applies for a one-unit property in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage if the boarder

• is not obligated on the mortgage loan and does not have an ownership interest in the property;

• has lived with the borrower for the last 12 months;

• can provide appropriate documentation to demonstrate a history of shared residency (such as a copy of a driver’s license, bill, or bank statement that shows the boarder’s address as being the same as the borrower’s address); and

• can demonstrate the payment of rental payments (such as with copies of canceled checks) to the borrower for

  • the last 12 months, or

  • at least 9 of the most recent 12 months provided the rental income is averaged over a 12–month period.

Payment of rent by the boarder directly to a third party is not acceptable.

Lenders may deliver purchase money mortgages for one-unit properties with cash-on-hand as an acceptable source of funds for the borrower’s down payment, funds for closing costs, and prepaid items.

Note: Cash-on-hand may not be used to fund the borrower’s reserve requirement, if applicable.

The lender must verify and document the following with respect to the cash-on-hand funds:

• The borrower customarily uses cash for expenses, and the amount of funds saved is consistent with the borrower’s previous payment practices.

• The lender must verify that funds for the down payment and closing costs exist in a financial institution account or an acceptable escrow account. Funds must be on deposit at the time of application, or no less than 30 days prior to closing.

• The lender must obtain a written statement from the borrower that discloses the source of funds and states that the funds have not been borrowed.

• The borrower’s credit report and other verifications should indicate limited or no use of credit and limited or no depository relationship between the borrower and a financial institution.

Fannie Mae considers sweat equity an acceptable source of funds for HomeReady loans when the borrower participates in an affordable housing purchase program run by an eligible provider. Sweat equity program providers must be a nonprofit organization exempt from taxation under Section 501(c)(3) of the IRS code with a demonstrated history of affordable housing construction and experience in managing volunteers.

Sweat equity can only be applied towards the down payment, and the borrower must comply with the requirements in Minimum Borrower Contribution for Purchase Transactions. 

The following table provides the maximum sweat equity amount and LTV ratio requirements based on property type.

The lender must document the loan is originated under a specific lending program. The value attributed to sweat equity must be based on the hours of work performed. The following table provides instructions for determining the contributory value of sweat equity.

For manually underwritten loans, the reserve requirements are documented in the Eligibility Matrix. For DU loan casefiles, DU will determine the reserve requirement.

The occupant borrower may not have more than two financed properties. See B2-2-03, Multiple Financed Properties for the Same BorrowerB2-2-03, Multiple Financed Properties for the Same Borrower, for the requirements.

For HomeReady mortgage loans secured by one-unit properties, if the loan-level credit score is less than the minimum credit score required for a HomeReady mortgage, the loan may still be eligible for purchase by Fannie Mae if the following requirements are met:

• The credit report indicates that the borrower’s credit score is low due to an insufficient traditional credit history (as documented by reason codes on the credit report that indicate a lack of credit accounts, accounts not opened long enough, lack of usage, etc., as reasons for the low credit score). If the borrower’s credit score is low due to derogatory credit or if none of the reason codes noted above appear on the credit report, then the minimum credit score for the transaction must be met (per the Eligibility Matrix).

• The lender must supplement the traditional credit file (referred to as a “thin file”) with the development of an acceptable nontraditional credit profile in accordance with Section B3–5.4, Nontraditional Credit History.

• The lender must deliver the borrower’s credit score (even if below the minimum required) along with SFC 818 at loan delivery to identify HomeReady mortgage loans that have borrowers with thin files.

  Note: Special Feature Code 818 should only be used to indicate a “thin file” HomeReady mortgage loan.