HomeReady vs Home Possible: 3% Down Without FHA

Jason just closed a loan for a buyer who came in asking for FHA. He had 3.5% to put down and a 695 credit score. His income was under the limit for HomeReady and Home Possible, so that is the program he closed on instead.

What these two programs are

HomeReady and Home Possible are conventional loans for buyers with moderate incomes. HomeReady is backed by Fannie Mae and Home Possible by Freddie Mac. They work much the same way:

• 3% down. Both allow a down payment as low as 3% on a home you will live in (Fannie Mae HomeReady, Freddie Mac Home Possible).
• An income limit. Your qualifying income can't be more than 80% of the area median income where the home is (Fannie Mae Selling Guide B5-6-01). Area median income, or AMI, is the middle income for households in that county.

We check your file against both, since the same buyer can fit one a little better than the other.

Why they often beat FHA

FHA is still the loan most people have heard of. Here is where HomeReady and Home Possible pull ahead.

No upfront mortgage insurance. FHA charges an upfront premium of 1.75% of the loan amount, usually rolled into the loan (HUD Mortgagee Letter 2023-05). On a $300,000 loan, that is $5,250 added to what you owe. HomeReady and Home Possible have no upfront charge.

The monthly insurance comes off. On a conventional loan, you can ask to cancel mortgage insurance once your balance is scheduled to reach 80% of the home's original value, and your servicer has to drop it automatically at 78% (CFPB on removing PMI). On FHA, if you put down less than 10%, the annual premium stays for the life of the loan, per HUD Handbook 4000.1. The only way out is to refinance.

Jason's rule of thumb. In his experience, with a credit score of 680 or higher the monthly mortgage insurance on HomeReady comes in lower than FHA's. That is why, when a buyer's income fits, he usually steers them here first.

When FHA still wins

FHA is not the wrong answer for everyone. It has no income limit, so if you earn more than 80% of your area's median income, HomeReady and Home Possible are off the table. FHA can also allow more room on credit and debt, which is why the answer depends on your whole file, not one number. See FHA vs conventional for the side-by-side.

Check the income limit for your area

The limit changes by county and every year, so look up the exact address:

1. HomeReady: Fannie Mae's area median income lookup. Enter the property address and it shows the income limit.
2. Home Possible: Freddie Mac's income and property eligibility map.

Not sure which income counts, or whether you are under the line? Call Jason at 904-389-4635 and he will check it with you. You can also see what you might qualify for first, with no credit pull. Or read more about conventional loans with North Florida Mortgage.