Today, FHA loans are the top mortgage for most first time buyers. This is primarily due to the low down payment required of just 3.5 percent of the sales price. In addition, there are no restrictions that many other low and no down payment might have. There are no income limitations and no rate or fee adjustments when a lower down payment is used compared to conventional loans.
Conventional loans, those underwritten to Fannie Mae or Freddie Mac requirements generally require a minimum down payment of 5.0 percent, not 3.5 percent. Yet to provide borrowers with additional options beyond an FHA loan, both Fannie and Freddie have introduced their versions of low down payment programs with a down payment of just 3%, lower than the FHA requirement.
Fannie Mae HomeReady:
Fannie Mae’s HomeReady loan program, while aimed at first time buyers, can be used by someone who has previously owned a home. And while there is mortgage insurance required, the mortgage insurance policy is eligible to be canceled when the loan amount reaches 80 percent of the current market value of the property.
This can be accomplished by property appreciation, paying down the mortgage balance or a combination of both. There is also a minimum credit score requirement of 620, which is higher than FHA’s 580 minimum. There are also income limitations for all borrowers listed on the loan application. The limit for all HomeReady loans is 80 percent of the area median income for the property’s location, regardless if the home is located in an area deemed “low income.” We can assist buyers that want to look up the area median income where the subject property is located, just contact us below.
The HomeReady program also permits that buyers can use cash for down-payment and closing costs from multiple eligible sources. This including gifts, grants, and Community Seconds – with no minimum personal funds required.
HomeReady & FHA Comparison
| Loan Benefits | HomeReady | FHA |
|---|---|---|
| Required down payment amount | 3% | 3.5% |
| Cancellable mortgage insurance or “PMI” | Yes | No |
| Immediate appraisal orders from lenders | Yes | No |
| Free from geographic restrictions on loan amounts | Yes | No |
Freddie Mac HomePossible:
HomePossible is Freddie Mac’s 3.0 percent down payment program. And while both programs are very similar as it relates to purpose and guidelines, there are some differences. Both programs ask for a minimum down payment of at least 3.0 percent for a single-family residence. However, with a duplex, HomeReady needs a 15 percent down payment. With a 3-4 unit property, HomeReady asks for a down payment of 25 percent. In both of these scenarios, HomePossible still asks for just the 5.0 percent as a minimum down payment.
HomePossible also has a slightly higher credit score minimum of 660, compared to Fannie’s 620. Both programs respect the prevailing conforming loan limit but HomePossible increases the maximum income limit to 100 percent of the area median income. If the property, however, is located in a designated low-income area there is no limit on household income. HomePossible requires the borrowers to complete a Homebuying Counselor Class for someone buying a first home while HomeReady requires such counseling to be completed for all. Other than these differences, the programs mirror one another.
For those who are looking for a mortgage that requires as little cash to close as possible, it’s important to note there are other options than the FHA program. But the upfront costs, as well as the cost of monthly mortgage insurance, needs to be considered. FHA loans require two forms of mortgage insurance, an upfront fee that is rolled into the loan amount and an annual premium paid in monthly installments. While HomeReady and HomePossible do have a monthly mortgage insurance premium payment, there is no upfront fee, just the monthly. This means less cash to close for both HomeReady and HomePossible compared to the FHA program.
Lenders don’t expect potential borrowers to know about all the low and no-down payment options. That said, if you’re wanting a low down payment mortgage with a lower overall monthly payment, the conventional HomeReady and HomePossible products should be considered. There are multiple approval requirements for these programs so before you get too much further into the homebuying process you should speak with your loan officer about all your options. After an initial conversation, your loan officer will provide you with your different options. If a low down payment option is one of your priorities, don’t be surprised to find the HomeReady and HomePossible loan programs in the mix.
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