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HomeReady Mortgage and FHA Mortgage Program Comparison

HomeReady Mortgage and FHA Mortgage Program Comparison

    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.

  • Great Mortgage IdeaSelect a lender below or use ourMORTGAGE RATES feature to contact multiple lenders that offer the HomeReady and FHA programs
  • Compare FHA Mortgage Rates as of July 16, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • 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

    Use the FREEANDCLEAR LENDER DIRECTORY to find lenders in your state that offer the HomeReady and FHA mortgage programs

  • 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.
  • 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. We recommend that borrowers contact multiple local lenders to understand the program that works best for them.

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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