By W. Todd Galde
FHA vs. Fannie Mae HomeReady Costs
A few crucial loan characteristics on Fannie Mae’s new HomeReady loan are (surprisingly) better than those offered on the FHA-insured loan from a cost perspective.
In case you’re unfamiliar, HomeReady is Fannie Mae’s affordable, low down payment mortgage product designed for creditworthy low-to-moderate-income borrowers, with expanded eligibility for financing homes in lower-income communities.
Unlike FHA, income limits may apply for most counties nationwide on the HomeReady program, but there are other areas where the HomeReady program is easily superior as it relates to loan costs and even interest rate.
Highlights of the HomeReady Program
The HomeReady program allows for as little as 3% down on loan amounts up to $424,100 (FHA requires 3.5% down) and as little as 5% down with loan amounts up to $636,150.
The biggest benefit of HomeReady, though, is the reduced cost of Mortgage Insurance due to reduced coverage requirements on loan-to-value ratios over 90%.
Here are three primary advantages of HomeReady over FHA:
FHA financing comes with a one-time 1.75% Up Front Mortgage Insurance Premium. On a $500,000 loan the FHA premium amounts to a cost of $8,750. This is generally added to the loan amount which increases the monthly payment as well. Fannie Mae’s HomeReady program has NO up front premium.
The “Annual” premium with FHA is .85% with 5% down or less, regardless of credit score. On a $500,000 loan that equates to an additional $354/month. With HomeReady, the annual premium can be more than half the cost with good credit, coming in around .40%, saving over $188/month.
Another benefit of the Fannie Mae HomeReady program is the Mortgage Insurance is cancellable when the loan-to-value reaches 80% or less. In essence, after several years it can be removed forever. With FHA, the monthly premium is mandatory for the life of the loan. The only way to remove it is to refinance the entire loan to a conventional format.
For new home buyers looking to purchase in 2017 who have been waiting to save up enough money, the HomeReady program may be an ideal solution in their quest.
Todd Galde - Mortgage Advisor
Commerce Home Mortgage