HomeReady Mortgage and FHA Mortgage Program Comparison

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

April 3, 2018

The HomeReady and FHA mortgage programs are both designed to help borrowers buy homes with low down payments.  In many cases a potential home buyer may be deciding between the HomeReady Program or the FHA Program so it is helpful to compare the programs so that borrowers can select the program that best meets their personal objectives and financial priorities.  Below, we summarize the programs, outline their similarities and differences and provide a detailed example that enables borrowers to compare the programs side-by-side.   

• Summary of HomeReady and FHA Mortgage Programs

HomeReady Mortgage Program: Offered by Fannie Mae through participating lenders, the HomeReady Program enables individuals with limited income and funds to buy a home with a down payment as low as 3.0% of the property purchase price and no minimum borrower contribution.  The HomeReady Program also allows lenders to consider non-traditional sources of income from non-occupant borrowers (parents), non-borrower household members (relatives) and boarders which improves a borrower’s ability to qualify for the mortgage or enables the borrower to qualify for a higher mortgage amount.

FHA Mortgage Program: Backed by the government and offered by participating lenders, the FHA Mortgage Program enables low-income individuals and individuals with limited funds to obtain mortgages and purchase homes with a down payment as low as 3.5% of the property purchase price.

• Similarities Between the HomeReady and FHA Programs

The HomeReady Mortgage Program and FHA Mortgage Program have several similarities, including the following:

• Although you do not have to be a first-time home buyer to qualify for either program, both are well-suited for first time buyers and mortgage borrowers
• Limits on mortgage amount eligible for program (conforming loan limit for the HomeReady Program / FHA loan limit for the FHA Program)
• Allow people to buy homes with a low down payment (3.0% for the HomeReady Program / 3.5% for the FHA Program)
• Focused on home buyers with low-to-moderate incomes and challenging credit profiles
• Require borrowers to pay extra fees in addition to their mortgage payment (private mortgage insurance (PMI) for the HomeReady Program / FHA mortgage insurance premium (MIP) for the FHA Mortgage Program)
• Both programs are offered by traditional mortgage lenders such as banks, mortgage banks, mortgage brokers and credit unions, although not all lenders offer the programs

HomeReady and FHA loans are provided by traditional lenders including banks, mortgage brokers and credit unions.  We recommend that you shop multiple lenders and compare HomeReady and FHA loan terms to select the program that best meets your needs.  Shopping for your mortgage is the best way to find the loan and lender that are right for you. 


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  P & I Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
  Mortgage Insurance Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%. (Estimated)
  Property Tax Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ... (Estimated)
  Homeowner Insurance Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ... (Estimated)
  Homeowner Association Fee Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs. (If Any)
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  Points Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
  Origination Fee Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
  Credit Report Fee Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
  Tax Service Fee Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
  Processing Fee Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
  Underwriting Fee Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
  Wire Transfer Fee Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower. (If Any)
  FHA Upfront Premium FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception. (If any)
  VA funding Fee (If any)
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  Other Fees Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees) The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.
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• Differences Between the HomeReady and FHA Programs

There are several differences between the HomeReady and the FHA programs, including the following:

• The mortgage rate for the HomeReady loan is typically higher than the rate for an FHA loan
• The HomeReady Program allows lenders to consider non-traditional sources of income from non-occupant borrowers, non-borrower household members and boarders when evaluating a borrower's mortgage application while the FHA Program does not permit lenders to consider these non-traditional income sources
• The HomeReady Program uses a debt-to-income ratio of 50% as compared to the 43% debt-to-income ratio typically used by the FHA Program, although the FHA Program permits a debt-to-income ratio of 50% or higher under certain circumstances. Debt-to-income ratio represents the ratio of how much you spend on monthly debt payments including your mortgage, property tax, homeowners insurance and monthly bills (such as credit card and auto loans) to your monthly gross income. Lenders use your debt-to-income ratio to determine what size mortgage you can afford, with the higher the debt-to-income ratio, the larger the mortgage amount borrowers qualify for.
• The FHA Mortgage requires a lower minimum credit score of 580 (with a 3.5% down payment) or 500 (with a 10% or more down payment) as compared to the 620 credit score typically required for the HomeReady Program
• Depending on where the property is located, the HomeReady Mortgage Program has borrower income limits whereas the FHA program does not
• The FHA Mortgage Program requires the borrower to pay an up-front FHA Mortgage Insurance Premium (MIP) in addition to an ongoing monthly FHA MIP fee. The HomeReady Mortgage Program does not require an up-front fee but does require the borrower to pay an ongoing monthly Private Mortgage Insurance (PMI) fee. PMI for a HomeReady mortgage is removed when the loan-to-value (LTV) ratio reaches 78% or less while borrowers are required to pay the FHA MIP over the entire life of the loan. LTV ratio is the ratio of the outstanding loan balance to the value of the property. As you pay down your mortgage balance or if your property value increases, the LTV ratio goes down.
• For borrowers with credit scores less than 740, ongoing private mortgage insurance for a HomeReady mortgage is typically more expensive than FHA mortgage insurance premium .  The amount of ongoing PMI and FHA MIP vary depending on the loan-to-value ratio, loan amount, mortgage term, mortgage program and borrower credit score.

Use the FREEandCLEAR Lender Directory to find top-rated lenders in your state that offer HomeReady and FHA mortgages and many other low down payment programs.


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• HomeReady Mortgage and FHA Mortgage Program Example Comparison

The example in the table below compares a HomeReady Mortgage with an FHA Mortgage.  The example uses a $200,000 fixed rate loan for both programs and looks at the total monthly cost to the borrower including the monthly payment plus private mortgage insurance for the HomeReady loan and FHA mortgage insurance premium for the FHA loan.  The FHA Mortgage also requires the borrower to pay an up-front FHA MIP fee equal to 1.75% of the loan amount, although the borrower can add this cost to the loan.

The HomeReady mortgage requires a lower down payment of 3.0% as compared to the 3.5% required down payment for the FHA Mortgage. For the purpose of this example, to calculate the required ongoing PMI and FHA MIP fees we use a credit score of 690, which is above the minimum credit score required for both programs: 580 for FHA (if you make a 3.5% down payment) and ~620 for HomeReady.

It is important to highlight that in order to qualify for the HomeReady 3% down payment program option, borrowers typically are required to have a minimum credit score of 680 - 700, depending on their debt-to-income ratio. Borrowers with a minimum credit scores of 620, and possibly lower, can qualify for the HomeReady program but are required to make higher down payments.

In this example, despite the larger FHA mortgage due to including the up-front FHA MIP in the loan amount, the borrower saves $95 per month by choosing the FHA loan because the mortgage rate is lower than the rate on the HomeReady loan, which is typically the case.  The example is illustrative and your individual situation will vary based on mortgage rates, loan amount, down payment, credit score and your financial goals.

When comparing HomeReady and FHA loans always keep in mind your total cost including both your mortgage rate and mortgage insurance but remember that HomeReady mortgage insurance is cancelable as you pay down your loan while FHA mortgage insurance is not. Review the comparison table below to understand the program that works best for you.

• 	FHA Mortgage	Fannie Mae HomeReady Mortgage
  Credit Score	690	690
  Minimum Down Payment	3.5%	3.0%
  Loan Amount	$200,000	$200,000
  Mortgage Term	30 Years	30 Years
  Interest Rate	3.750%	4.250%
  Up-Front Mortgage Insurance Premium (MIP) (%)	1.75%	Not Required
  Up-Front Mortgage Insurance Premium (MIP) ($)	$3,500	Not Required
  Total Loan Amount ($)	$203,500	$200,000
  Ongoing Monthly Mortgage Insurance Rate (%)	.85%	1.15%
  Ongoing Monthly Mortgage Insurance ($)	$144	$192
  Monthly Mortgage Payment (Principal & Interest)	$942	$989
  Total Monthly Payment (Principal, Interest & Mortgage Insurance)	$1,086	$1,181
  Difference	$95

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• Related FREEandCLEAR Resources
  • Comparison of Low / No Down Payment Mortgage Programs
    




Sources

HomeReady Program: https://www.fanniemae.com/singlefamily/homeready

FHA Program: https://www.hud.gov/federal_housing_administration

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