If you want to refinance your loan into a HomeReady mortgage or you simply want to refinance your existing HomeReady loan, the opportunity is there. Before you jump into the process, however, you should understand the parameters of the loan to determine if it is the right choice for you.
Fannie Mae Must Own the Loan
The first step is to determine if Fannie Mae owns your existing loan. If your first loan is not owned by Fannie Mae, you are not eligible to refinance into the
HomeReady program. This does not mean you must have a HomeReady mortgage to refinance into another one – you simply have to have any of the Fannie Mae programs in order to qualify. The lender can determine this fact in one of the following ways:
- Verifying it through the lender’s servicing system if you use the same lender
- Verifying it with the current loan servicer
- Verifying it on Fannie Mae’s website with the Loan Lookup Tool
The proof provided must provide concrete evidence that Fannie Mae owns the loan in order to proceed.
Limited Cash Out
Refinancing is sometimes an opportunity for a homeowner to take equity out of their home. Rather than having the money tied up in a non-liquid asset, borrowers tend to ask to take out a portion of the money that now belongs to them. With the HomeReady refinance, however, only limited cash out is acceptable. In this instance, it means a maximum of 95 percent loan-to-value ratio, which is lower than the standard 97 percent LTV when you purchased the home, if you used the HomeReady program. If you choose an adjustable rate mortgage, the maximum LTV drops to 90 percent.
Your income must meet the strict requirements of the Fannie Mae guidelines in order to qualify for this low-income program. You can determine which area your home falls under by looking up your address on the Fannie Mae HomeReady website. It will fall into one of the following categories:
- Low-income census tract – If your home falls into this area, there are no maximum income amounts that you must abide by
- High-minority census tract – If your home falls into this area, you can make a maximum of 100 percent of the average median income for the area in order to qualify
- Any other area – If you do not fall into any of the above categories, then you cannot make more than 80 percent of the average median income for the area in order to qualify
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There are varying types of qualifying income you can use to qualify for the HomeReady mortgage refinance that differ from any other loan program:
- Non-borrower income – You are able to use non-borrower income as long as they live in the home with you. With adequate proof of their living arrangements, you can use their income as a compensating factor if your qualifying debt ratio is between 45 and 50 percent. The income does not help to lower your debt ratio for qualifying purposes, but rather to show that you do have other income to rely on in the event that you run into financial difficulty. This helps lenders approve your higher debt ratio.
- Boarder income – If you have a boarder that pays rent on a monthly basis, the income can be used as qualifying income as long as you can prove that the boarder lived with you for the last 12 months and paid rent during that time. If you do not have proof of 12 months, but have at least 9 months of proof, you can use that income; however, it will get annualized, which will decrease the monthly income accordingly.
- Accessory unit income – You can also use rental income from an accessory unit, such as a basement apartment or mother-in-law unit, in order to increase your qualifying income.
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The HomeReady mortgage program requires that you undergo
proper education in order to obtain a Limited Cash Out Refinance. This education is provided through Framework and can be completed in the comfort of your own home. The program is offered online and takes between 4 and 6 hours to complete. Upon completion, you will receive a certificate, which your lender will require in order to close the loan. The education covers all aspects of home ownership and mortgages in order to fully educate you on what you are getting yourself into and what you can expect in an effort to decrease the risk of foreclosures.
All other aspects of the HomeReady mortgage refinance are similar to any other program. The lender will pull your credit, ask for documentation of your income, such as paystubs, W-2s, and tax returns, ask for personal identifying information as well as information pertaining to your employer, and any proof of assets or other compensating factors that you wish to provide in order to qualify for the HomeReady refinance.
The benefits of this program include low interest rates, low closing costs, and lower PMI rates, making your loan more affordable overall. Because you have the opportunity to use income from extended family members, you have a better chance of getting approved if your debt ratio is borderline and your income is in line with the maximum amounts allowed for the area you reside.
If you are thinking about refinancing, consider the HomeReady mortgage option. It is simple to determine if your income qualifies, just by visiting the Fannie Mae website. Once you know that your income meets the required standards, you can proceed with the process to see just how much money this loan program can save you.
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