HomeReady Mortgages: A Great Alternative to FHA Loans

High home prices have continued to persist, and we can’t blame anyone for starting to feel like the dream of home ownership is starting to slip away. However, there are programs available that are specifically designed to help potential homebuyers deal with the challenges posed by elevated home prices and interest rates, like the FHA loan program. Basically, these kinds of programs usually allow for a much lower down payment than conventional mortgages, and have more flexible credit requirements. 

However, FHA loans aren’t the only option available for borrowers who are struggling to afford the purchase of a new home! Another option is the HomeReady Loan, which offers some unique benefits over FHA loans for borrowers who meet the eligibility requirements. HomeReady loans are perfect for people who have fairly good credit, but don’t have the cash to put up a 20% down payment. There is also an income limit for the program, Fannie Mae has a free tool that you can access to view the income limit in your area.

A major benefit of the HomeReady program is that it offers an even lower minimum down payment than FHA loans do.  Any down payment  is still a lot of money to come up with, of course! Fortunately, HomeReady loans have more flexibility than FHA loans in terms of being able to obtain down payment funding from family gifts, grants, and other sources other than your personal savings. 

Another big benefit is how private mortgage insurance, or PMI, works with a HomeReady mortgage. PMI is a monthly payment you make as part of your mortgage when your mortgage loan is more than 80% of the value of your house. HomeReady mortgage PMI works differently from FHA mortgages in some very important ways:

• With a HomeReady loan, even if your initial down payment was just the minimum 3%, you can cancel your PMI payments as soon as the balance on your mortgage is less than 80% of the total value of your home (This is called the Loan-to-Value Ratio, or LTV).  With an FHA loan, PMI payments can’t be canceled if you put less than 10% down for your home, even after your home meets the 80% LTV requirement. This means that with an FHA loan, the only way to remove the expense of PMI payments is to completely refinance your mortgage.

• With a HomeReady mortgage, your PMI payments are reduced if you’re able to make at least a 10% down payment. With an FHA loan, you’ll pay the same PMI costs regardless of how large your down payment was, unless you’re able to make a down payment of at least 20%.

• With an FHA loan, you pay a monthly PMI cost as part of your mortgage, but you also pay a large up-front PMI payment when you take out the mortgage as well. This up-front PMI payment can be over 1% of the cost of your home, which is a huge expense. HomeReady mortgages don’t have any up-front PMI payment, saving you thousands of dollars.

The main downside of the HomeReady program is that it does have some stricter eligibility requirements than an FHA loan. In addition to the income limit mentioned above, the HomeReady loan program also requires first-time borrowers to complete a housing education course that teaches some principles of home ownership. This course is available to take at no cost, and it contains a lot of helpful information that can help you gain essential knowledge to make you a well-informed homebuyer.

If you’re curious about HomeReady mortgages and would like to know more, check out our HomeReady loan page and speak with a Mortgage Loan officer today!