HomeReady vs. FHA: Which One is Right for You?

Buy a house with a 3% down payment.

HomeReady loan versus FHA loan over laying the picture of a 2-story houseRecent years have seen an increase in the accessibility of home ownership. Although it is a common claim, less money is now needed to purchase a home, with some buyers only needing a 3% down payment. Similarly, homeowners can refinance their current loan with as little as 3% equity. The cost of apartment living is still high despite the increase in interest rates. Sellers used to have the upper hand in the market, but things have changed recently, giving buyers a chance to buy a home at a lower cost and refinance at a lower interest rate when rates drop.

This article will compare the Fannie Mae HomeReady loan to the FHA loan. The HomeReady loan follows similar guidelines as the Conventional 97 but with a few notable distinctions.

Here is a short comparison of the key guidelines for FHA loans and HomeReady loans:

 FHA Loans:

  • Down payment: as low as 3.5%
  • Credit score: as low as 500 with a 10% down payment, 3.5% down payment with a credit score greater than 579.
  • Debt-to-income ratio: as high as 50%
  • Mortgage insurance: required for the life of the loan
  • No first time home buyer requirement
  • Upfront mortgage insurance premium: 1.75% of the loan amount

HomeReady Loans:

  • Down payment: 3%
  • Credit score: typically 620 or higher
  • Debt-to-income ratio: typically no higher than 45%
  • First time home buyer requirement
  • Mortgage insurance: required until the LTV reaches 78%
  • Upfront mortgage insurance premium: not required

I want to stress that the requirements might change depending on the lender and loan program, and I advise getting in touch with the lender or loan officer to find out the latest and correct information. Choosing the loan package that best suits your requirements means keeping your circumstances in mind.

Minimum Credit Score

HomeReady Minimum Credit Score

The minimum credit score requirement for a Fannie Mae HomeReady loan is 620, considered a "fair" credit score and on the lower end of the spectrum for conventional mortgage loan approvals.

However, lenders can require a higher credit score, usually a minimum of 640. It's worth noting that having a higher credit score can help you qualify for lower interest rates and better loan terms and give you more options among different loan programs. If your credit score is below 620, it may not be easy to qualify for a HomeReady loan.

It would help if you considered other loan options or improve your credit score before applying for a mortgage. Remember that guidelines may change over time, and different lenders may have additional credit score requirements. So, checking with your lender for the most current credit score requirements and guidelines is recommended.

FHA Minimum Credit Score

The minimum credit score requirement for an FHA loan is 500 with a 10% down payment. However, if your credit score is 580 or above, the down payment requirement drops to 3.5%. FHA financing has more relaxed credit requirements compared to the HomeReady loan.

Debt to income ratio

HomeReady Debt to income ratio

The borrower must meet the required debt-to-income (DTI) ratios. Although Fannie Mae does not explicitly state the DTI requirements for a HomeReady loan, the standard DTI ratio is 43% or lower, according to most lenders' guidelines.

By dividing the borrower's gross monthly income by their monthly gross debt obligations, the lender calculates the DTI ratio. With a lower DTI ratio, a borrower has less debt overall and is more likely to be able to make loan payments.

It's crucial to remember that different lenders may have additional DTI requirements, and some lenders may have more lenient DTI guidelines for particular loan programs like HomeReady. It is therefore advised to check with your lender for the most recent DTI requirements and procedures.

FHA Loan Debt to income ratio

Less strict credit score criteria apply to FHA loans. The highest DTI allowed for FHA loans is 57%, even though most lenders prefer to maintain the debt ratio at 43% or below. As a result, borrowers with high debt-to-income ratios may find FHA loans more suited.

Loan Type

HomeReady Loan Type

The Fannie Mae HomeReady loan requires a fixed-rate mortgage. This means that the lender will not change the interest rate during the loan life, regardless of market conditions, providing the borrower with the security of knowing their mortgage payments for the entire loan term. This makes budgeting and planning for the future easier.

The loan term of a Fannie Mae HomeReady loan is 30 years, requiring full repayment within 30 years from the date of disbursement. The borrower will make fixed monthly payments, including principal and interest, during this period. At the end of the loan term, the borrower will fully repay the loan and own the property free and clear.

However, it's important to note that different lenders may have other loan terms and interest rate options, so it's recommended to check with your lender for the most current fixed-rate mortgage guidelines and requirements.

FHA Loan Type

The borrower can choose fixed- or adjustable-rate financing via the FHA. The borrower has a selection of 30 or 15-year loan terms.

Mortgage Insurance

HomeReady loans, which Fannie Mae supports, allow a minimum down payment of 3%. However, if the down payment is less than 20%, borrowers must pay for private mortgage insurance (PMI). The cost of PMI varies depending on the borrower's credit score and can range from 0.46% for those with a credit score of 760 or higher to 1.5% for those with a credit score of 620. There is no upfront fee unless the borrower chooses the split premium option.

FHA Mortgage Insurance

FHA loans, like HomeReady loans, have multiple monthly mortgage premiums based on the term and down payment. However, one of the benefits of FHA financing is that the FHA does not adjust the mortgage insurance premium based on credit score. Whether an applicant has a 620 or a 780 credit score, the cost of the MI premium is always 0.85% of the loan amount (for the minimum down payment). This makes FHA financing more beneficial for low credit score home buyers and refinancing homeowners. Additionally, borrowers must pay a lump sum fee at settlement, although this upfront premium can be financed into the loan.

Income Limit

HomeReady Income Limit

The total annual qualifying income cannot exceed 80% of the area median income (AMI) for the property’s location. Lookup area median income

FHA Income Limit

FHA loans do not have any income limit.

Loan Limit

HomeReady Loan Limit

In most parts of the continental United States, the Federal Housing Finance Agency (FHFA) has set the 2023 loan cap for a Fannie Mae HomeReady loan at $726,200 for a one-unit principal residence; however, it may be higher in high-cost areas. The required down payment for this kind of mortgage is 3%, with the remaining 97% being financed by the lender. The maximum loan amount will be determined by the FHFA based on the debt-to-income ratio and may vary depending on the region and kind of property being purchased.

FHA Loan Limit

For most U.S. counties, the maximum loan limit is set at 60% of the conventional loan limit. This difference offers a significant advantage for HomeReady loans.
See FHA county loan limits

Pros of HomeReady Loan:

  1. Low down payment requirement of 3% of purchase price.
  2. PMI may be cancelled when the loan decreases to 78% of the purchase price.
  3. Possibility of lower mortgage insurance premiums (MIP) than FHA loans and potentially lower monthly payments with a high credit score.
  4. No upfront mortgage insurance.
  5. Can be used on a single-family home, condo, townhome, or 2-4 unit property.

Cons of HomeReady Loan:

  1. Higher interest rates compared to FHA loans and other traditional lending products.
  2. The income limit is 80% of the area median income
  3. Borrowers must complete a Homebuyer Education course before obtaining the loan – this may require additional time and cost to complete the process of obtaining the loan.
  4. Limited availability of lenders willing to offer this type of loan product in certain areas.
  5. Seller concession is limited to 3% with a down payment less than 10%.

Summary

This article compares the Fannie Mae HomeReady loan to the FHA loan. The HomeReady loan has a 3% down payment requirement and a minimum credit score of 620, with a debt-to-income ratio typically no higher than 45%.

The FHA loan has a down payment requirement as low as 3.5% and a minimum credit score of 500, with a debt-to-income ratio as high as 50%. The HomeReady loan requires mortgage insurance until the LTV reaches 78%, whereas the FHA loan requires it for the life of the loan. It is important to note that requirements may vary depending on the lender and loan program, and checking with the lender for the most up-to-date information is recommended.

SOURCE:
FHA - HUD Handbook 4000.1
97% Loan to Value Options
Fas: 97% TV Options