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Freddie Mac Home Possible is a specialty mortgage program for first-time homebuyers which allows for down payments of as low as 3%-5% and features reduced private mortgage insurance (PMI), which can be canceled once your home equity reaches 20%. Home Possible has unique guidelines and requirements that you need to meet before you can take advantage of the benefits. This article describes the purpose of the Home Possible program, its features, and the steps you can take to qualify.
What is Freddie Mac Home Possible?
Freddie Mac’s Home Possible and Home Possible Advantage programs were created to offer low down payment mortgage options for first-time homebuyers with moderate incomes. These are both conventional mortgage programs, but they only require 3% or 5% as the minimum down payments. With backing from Freddie Mac, the Home Possible programs are also able to offer reduced mortgage insurance rates and premiums, more flexible credit terms, and even refinancing options for existing homeowners.
The purpose of the Home Possible and Home Possible Advantage programs is to finance the purchase or refinance of primary residences, two- to four-unit owner-occupied properties, and eligible manufactured homes. Both programs are geared toward first-time homebuyers who have limited funds available for their down payments but meet the rest of the lending criteria. There are some key differences between the two programs to consider:
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How Do I Qualify for a Freddie Mac Home Possible Mortgage?
In order to qualify for a Freddie Mac Home Possible mortgage, you must meet the debt-to-income ratio requirements for the program. Typically, this means that a maximum of 43% to 45% of your gross income goes toward your monthly debts. The Freddie Mac automated underwriting service can allow for a higher ratio, so it’s important to consult with a mortgage professional about your specific scenario.
Your income must fall within the stated guidelines, based on the location of the home. The easiest way to confirm this is to use the eligibility tool on the Freddie Mac website. The tool takes into account the median income for households in the area around the home. Certain areas require that your income not be more than 100% of the median income, while other areas don’t have an income limit because they’re considered underserved.
You must also be considered a first-time homebuyer. This doesn’t mean that you’re excluded if you’ve owned a home in the past. As long as you haven’t been on the loan or title for another property within three years of applying to Home Possible, you are considered a first-time homebuyer. There are exceptions for situations like inheriting a stake in a property or acting as a co-signer on a mortgage loan, for example. In any case, you cannot be the resident owner of another home.
Finally, you must complete an approved homebuyer education course. At least one borrower is required to complete a Freddie Mac-approved homebuyer education course prior to the loan closing. Courses are available online and in-person, and the courses provide valuable information and insights.
How Do I Apply For a Freddie Mac Home Possible Mortgage?
In order to apply and qualify for a Home Possible mortgage, you’ll need to start by selecting a lender who offers Home Possible mortgage products. Many lenders are approved sellers and servicers with Freddie Mac, although some feature their own reduced down payment loan options. Have the lender calculate your income based on Freddie Mac guidelines. For this to be an accurate assessment, you’ll need to provide the lender with some supporting documentation (like pay stubs, W-2 forms, and bank statements). Going through the preapproval process will give you peace of mind knowing that your financing is in order before you start home shopping.
Once you know how your income will be considered, identify geographic areas you’d be interested in and confirm that you meet the maximum income requirements by using the eligibility tool. Consider working with a real estate agent who is familiar with the neighborhood and who enjoys working with first-time buyers. Their expertise in navigating the offer, negotiation and inspection processes will help everything go more smoothly. Also, if you work with a buyer’s agent, their services often come at no cost to you – they’re paid out of the seller’s proceeds.
When you have an offer accepted, your mortgage application will continue on through the same process as regular conventional loans. Your income, assets and credit will be reviewed and confirmed. The property will be appraised to determine its value. Lastly, you will need to make sure you complete your homebuyer education course prior to closing.
What Are the Advantages of Freddie Mac Home Possible?
There are a few key areas where Home Possible and Home Possible Advantage can add value. We compare Home Possible to a few other government financing programs below.
Home Possible vs. FHA Loans
First, each program offers reduced mortgage insurance rates and premiums, compared with conventional financing, which reduces your overall housing expense — and could help you qualify for a larger loan as a result. Unlike Federal Housing Administration (FHA) loan programs, the mortgage insurance on these conventional loans can be canceled once you reach a 78% to 80% loan-to-value ratio. This avoids the expense of refinancing just to eliminate mortgage insurance in the future.
Mortgages through Freddie Mac also aren’t subject to FHA county loan limits, which could restrict your purchase options, especially in desirable areas. Unlike FHA 3.5% down payment programs, Home Possible doesn’t charge an additional upfront mortgage insurance premium (which is equal to 1.75% of the loan amount). This is typically rolled into the loan, unless you bring in more funds to closing, meaning that it is financed over the loan term and you’re paying interest on top of the 1.75% fee.
Home Possible vs. VA Loans
There’s no funding fee on Home Possible loans, which can make up a significant portion of special government programs like loans from the Department of Veterans Affairs (VA). The VA charges 2.15% of the loan amount for first-time use and 3.3% for each subsequent use. The VA funding fee is also typically rolled into the loan unless paid upfront, so again you’re paying interest on top of the fee over the life of the loan. Having fewer upfront costs keeps initial loan balances lower on Home Possible loans and, subsequently, requires lower monthly payments and less interest over the loan term.
Freddie Mac Home Possible vs. Conventional Loans
Home Possible offers more flexible credit terms than most conventional loans, even allowing borrowers without credit scores to qualify based on acceptable automated underwriting results and payment references. If one or both borrowers don’t have credit scores, then they need to have noncredit reporting lines open (12 months or longer). This can include utility bills, telephone contracts or subscription services like cable TV and internet. If neither borrower has a credit score, one of these payment references must be a housing expense line, such as rental payments. This willingness to accept scenarios on a case-by-case basis and accept the automated findings of Loan Product Advisor increases the chances that your mortgage application will be approved.
In summary, Freddie Mac’s Home Possible and Home Possible Advantage programs create additional opportunity for homeownership in three key ways:
- They reduce the down payment requirements to 3%-5% from the standard 20%.
- They keep the upfront costs of purchasing a home low.
- They reduce the total PMI requirements that need to be paid, when compared with conventional mortgage products and FHA loans.