More and more people are moving to urban areas, millennials especially. That’s where the jobs are located, as well as the culture and excitement that twenty-somethings who are tired of the suburbs where they grew up are looking for. But as all those people keep packing into cities and their surrounding areas, home prices are soaring. At the same time, multi-generational households have become more and more popular. Today, it’s not just mom, dad, and junior in a house–there are single parents, grandparents, live-in partners, uncles, cousins, roommates and renters to account for as well.
The people who run Fannie Mae have recognized the potential for non-borrowers to help contribute to household expenses and even a mortgage. They refer to these situations as “extended income households” (EIH). According to Fannie Mae, in 2013, 14% of mortgage holders were part of extended income households. The breakdown was roughly 25% Hispanic, 20% African-American and 17% Asian-American, and the rest non-identified. They have established a program called HomeReady that takes into account the income of other household members if it equivalent to at least 30% of the borrower’s income. This is an innovative solution for people who may not have previously been able to afford to buy a home in a desirable neighborhood with the job they want.
A Game Changer for Extended Income Households
Consider a single mother who is looking to buy a home, but is stretched past the 45% debt to income ratio limit, also known as DTI. With HomeReady the income of other members of her household, such as a parent, can be taken into consideration on her mortgage application to Fannie Me. The home buyer is still the only one responsible for the mortgage, but the income of the other members is entered into the equation to allow the underwriters to stretch the DTI limit. If her DTI was 47% Fannie Mae underwriters would accept a change in their ratios, up to 50%, because they realize that the other occupants in the home could assist with the burden of expenses. In fact, all contributors don’t even have to live in the home. Fannie Mae will allow parents, for example, to become “co-borrowers” to help their children quality for a mortgage. And those contributing don’t have to be family members, either. Fannie Mae will also take into account the income from renters as well. One last major perk of the program is that home buyers can buy a property with as little as 3% down if they qualify for Home Ready.
The HomeReady program doesn’t just benefit multi-generation households, but also provides an opportunity for lenders to write more loans, and is a great tool for real estate agents. Families and households are different today. Circumstances are different, and home buying looks different. Fannie Mae has adapted its criteria to meet those changes and created a modern program to help families and individuals achieve the American Dream of owning a home.
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