A mortgage loan originator is a mortgage loan originator is a mortgage loan originator. That’s exactly how most home financers see it. How will you attract the attention of qualified customers and generous referral sources with so many thirsty competitors out there competing for the business for which you salivate? One important way to not only survive in the highly-competitive mortgage loan originations world, but actually prosper, is having a surefire supply of solutions at the ready to offer borrowers who might not fit inside the plain vanilla envelope. Just like a competent physician is well-equipped to accurately diagnose and properly treat her patients, you, as the Mortgage Doctor, must be equally competent and resourceful.
Noticeably standing apart from one’s competition requires a knowledge of and access to unique products that cater to the “outside the box” borrower. One such important product with which all loan originators should be familiar is the HomeReady® Mortgage. As a replacement to the formerly-popular My Community Mortgage® product, the HomeReady® low down payment program affords first-time homebuyers, those who currently own property and who are selling, and those who have previously owned a home with the opportunity to refinance their mortgage or own a new home with a down payment of as little as 3%.
The HomeReady® Mortgage program accommodates flexible sources for the borrower’s down payment and settlement fees. Acceptable sources consist of:
- Community Seconds®;
- Cash-on-hand (for one-unit properties only);
- Sweat equity; and
- Seller’s concessions.
No borrower contribution is required when the property is a single-family dwelling and sweat equity is not being used to satisfy the down payment. Sweat equity refers to an increased property value resulting from the labor expended to maintain, improve, and restore a property. In any circumstance where sweat equity is used to pay for the down payment or when the property is a multi-unit dwelling with an initial LTV greater than 80%, the borrower must contribute a minimum of 3% from his or her own funds.
The HomeReady® product may only be utilized to purchase a home intended for use as a primary residence or for the refinance of an existing primary-residential lien through a limited cash-out refinance (LCOR). Fannie Mae limits the number of financed properties that a borrower may own to two (including the property financed through the HomeReady® program) when a borrower pursues a HomeReady® loan.
Eligible property types consist of single-family to four-family units with some variability applicable between property types. For example, if the property is a single-family dwelling, eligible property types include condominiums, co-ops, PUDs, and manufactured housing.* If the property type consists of more than one living unit, condominiums, co-ops, and manufactured housing are prohibited.
* Loan types for manufactured homes are restricted to the standard fixed-rate, 7/1 ARM, and 10/1 ARM. Buydowns are not permitted.
HomeReady® borrowers’ total annual qualifying income may not exceed 80% of the area median income (AMI) applicable to the property’s location, regardless of its census-tract income level’s designation. AMIs may be identified through:
The HomeReady® program may be utilized through a 10-, 15-, 20-, or 30-year fixed-rate mortgage and also accommodates 5/1, 7/1, and 10/1 ARMs (2/2/5 and 2/2/6 CAPs apply respectively).
LTV and CLTV Considerations
- Single-family residential purchase: 97%.
- Single-family limited cash-out refinance (LCOR): 95% for a fixed-rate product and 90% for an ARM.
- Two-family dwellings (purchase or LCOR): 85% for a fixed-rate product and 75% for an ARM.
- Three-to-four-family dwellings (purchase or LCOR): 75% for a fixed-rate program. ARMs are not permitted.
- Manufactured housing is always limited to 95%.
- With an eligible Community Second®: 105%.
The HomeReady® program allows for temporary interest rate buydowns structured as 3-2-1 and 3-1 only. As discussed in a previous article, temporary interest rate buydowns generally act as a seller incentive to motivate a buyer to buy their home. Typically, a temporary buydown will apply when a seller offers seller’s concessions amounting to the difference between the payment amount associated with the borrower’s actual interest rate and a payment amount equivalent to a lower interest rate for a defined period of time.
Let’s consider the following example:
A seller wants to incentivize an individual to buy her home. She offers seller’s concessions to be used as a 3-2-1 temporary buydown. The buyer would be borrowing $200,000 for which he would secure a 30-year, fixed-rate loan at an interest rate of 6% resulting in a monthly principal and interest (P&I) payment of $1,199.10. Through a 3-2-1 buydown, the seller would agree to finance concessions amounting to the difference between the note rate of 6% and a rate of 3% for the first year, 4% for the second year, and 5% for the third year. In year four, the borrower would remit payments equivalent to the note rate.
At 3%, the borrower’s principal and interest payment would be $843.21. Since the mortgage servicer always requires a $1,199.10 payment amount equivalent to the note rate of 6%, the seller would have to concede 12 payments of the difference amounting to $4,270.68 (1,199.10 – 843.21 = 355.89. 355.89 x 12 = 4,270.68) for the first year. During the second year, the borrower would remit a payment amount equivalent to an interest rate of 4% or $954.83. Since the difference between the true P&I payment of $1,199.10 and the second year’s reduced payment of $954.83 is $244.27, the seller would also have to concede $2,931.24 for year two (244.27 x 12). In year three the borrower would increase his payment amount by remitting the equivalent of an interest rate of 5% ($1,073.64). The seller would also have to account for the difference of $1,505.52 (1,199.10 – 1,073.64 = 125.46. 125.46 x 12 = 1,505.52). In year four, the borrower would begin remitting the true P&I payment of $1,199.10 on his own.
Through this scenario, the total seller’s concession would amount to $8,707.44 (4,270.68 + 2,931.24 + 1,505.52) which the seller would concede to the mortgage servicer through a reduction in the sale’s proceeds received. The mortgage servicer would retain this money in an escrow account used to supplement each periodic payment that it receives from the borrower throughout the first three years. Regardless, the total amount of the concession could not exceed 3% of the home’s purchase price.
Reduced Private Mortgage Insurance
One of the most appealing considerations of the HomeReady® Mortgage program is its reduced private mortgage insurance (PMI) premium requirements.
For this example, let’s assume a representative credit score of 720, a loan amount of $200,000, and a 97% LTV on a typical fixed-rate HomeReady® product. Standard Fannie Mae PMI guidelines would typically require 35% coverage for any loan with a 3% down payment. By using Enact’s PMI Rate Card accessible through:
an LTV of 97% with a coverage amount of 35% would correspond to an exposure rate of 63%. Considering the representative credit score of 720, the PMI factor would be 0.95% resulting in a monthly PMI premium of $158.33 (200,000 x 0.95% = 1,900. 1,900 ÷ 12 = 158.33).
The HomeReady® program’s reduced PMI criteria only requires 25% coverage with a 73% exposure rate. Consequently, the PMI factor for this loan with a representative credit score of 720 would be 0.77% versus 0.95% corresponding to a PMI premium of $128.33 (200,000 x 0.77% = 1,540. 1,540 ÷ 12 = 128.33).
Standard PMI removal parameters apply which can be quite beneficial to the borrower as well.
Pre-Purchase Homebuyer Education
When the HomeReady® mortgage is used to purchase a home, the borrowers will be required to take and complete pre-purchase homebuyer education when all occupying borrowers are first-time homebuyers. The education may be satisfied through completing the Framework Homeownership Education Course on-line through:
There is no cost to take and complete this course.
- Non-traditional credit consisting of obligations that typically do not appear on a credit profile may be utilized through manual underwriting for applicants who do not have an adequate overall amount of traditional credit or enough credit to generate a representative credit score.
- Loan level pricing adjustments may be required based on credit score and other factors.
- Minimum credit score requirements for single-family properties: 620.
- Minimum credit score requirements for two-to four-unit properties: 640.
- Boarder and renter income may be used.
- Income from non-borrowing household members may be utilized as a compensating factor when the applicant’s debt-to-income (DTI) is greater than 45% but not greater than 50%. This income will not contribute to acceptable income limits.
As you now realize, the HomeReady® Mortgage program is a highly-effective tool to have at your disposal as a successful mortgage loan originator. By staying abreast of the current products available to meet consumers’ ever-evolving needs, the educated and informed mortgage loan originator will certainly stand apart from and outshine his or her thirsty competition.