Over the past 20 years, the means by which an individual can find and finance a property have changed dramatically. The devastating effects of the 2007 economic crisis delivered many powerful lessons to investors, homebuyers and mortgage lenders, all of which have helped inform the methods used today to facilitate the growth of the domestic housing market. Today, there are two mortgage options that involve government-backed or sponsored lending. Federal Housing Administration loans as well as Fannie Mae's HomePath are two options for individuals seeking to find affordable methods for entering the world of homeownership.
TL;DR (Too Long; Didn't Read)
The FHA loan programs and Fannie Mae's HomePath/HomeReady platforms offer valuable mortgage loan assistance. Strictly concerning closing costs, Fannie Mae's mortgage assistance could be more financially advantageous for qualified buyers.
Exploring FHA Loans
FHA loans are one of the most powerful mortgage lending platforms available to potential homebuyers today. That being said, it is important for potential buyers to realize that the FHA does not actually provide funding to applicants, but instead backs loans from private lenders made to individuals who may not qualify for private conventional loans.
The FHA manages several different loan formats, each of which targets a specific demographic of people who may be seeking financial assistance. For example, FHA loan offerings include fixed- and adjustable-rate mortgages, reverse mortgages as well as growing equity mortgages. With each particular program, individuals can benefit from relaxed eligibility requirements and more comfortable payment terms compared to private mortgages.
Eligibility Rules for FHA Loans
As a general rule, an individual can qualify for an FHA mortgage loan with a credit score of 580 or above. This credit score will allow applicants to secure the cost-effective 3.5 percent down payment requirement, which is extremely generous compared to the 20 percent down rule commonly associated with private mortgages. In the event that an individual has a credit score below 580, this doesn't automatically void their eligibility for FHA loans. However, they will likely be required to pay a minimum of 10 percent of the sale price of the home as a deposit.
With any FHA mortgage, borrowers will be required to pay an upfront mortgage insurance premium equivalent to 1.75 percent of the total mortgage amount. Borrowers will also be required to pay premiums on monthly mortgage insurance in addition to the standard mortgage payment.
FHA Approved Listings
The FHA imposes limitations on mortgages for their loan programs. These limitations can be found by searching for a specific state and county on the FHA website. Taking the limitations of FHA approved homes into consideration is an important first step for mortgage applicants. If, for example, a homebuyer sets their sights on a property that cannot be fully funded by an FHA loan, they will either have to make up the difference in funds themselves or search for a different property.
Understanding the HomePath Program
Fannie Mae's HomePath program is primarily designed as a marketplace for investors, homebuyers, nonprofits and real estate agents to seek out foreclosed properties in their area. Using a powerful search platform, users can quickly locate a diverse collection of foreclosure properties within their city, state or ZIP code. It is also possible to search for properties using their specific Multiple Listing Service number.
With this in mind, it is important to make clear that HomePath is not a loan assistance service like the FHA loan platform. Instead, HomePath acts as a conduit for finding properties that are also directly connected to Fannie Mae's mortgage programs. When a homebuyer finds a property they like on the HomePath website, they can then explore financing options as part of Fannie Mae's HomeReady mortgage assistance platform.
HomeReady acts as a direct competitor to the FHA loan assistance program. For example, individuals can qualify for a HomeReady loan with as little as 3 percent down. Although private mortgage insurance is required on HomeReady loans, Fannie Mae allows homebuyers to cancel these premiums once their equity in the property reaches 20 percent. Also, unlike the mortgage limits imposed by the FHA, there are no borrowing limits based on geography as part of the HomeReady loan program.
HomePath and Credit Scores
Although Fannie Mae HomePath property resources exceed the benefits of FHA loans in many areas, it is important to note that this particular financing platform is primarily intended for borrowers who have a credit score of 620 or higher. When an individual's credit score exceeds 680, they are granted access to even better financing opportunities. HomePath remains slightly more selective than the FHA with respect to an applicant's risk profile.
Closing Cost Comparisons
When an individual applies for a mortgage through the HomeReady mortgage assistance platform, they can qualify for a 3 percent closing cost assistance credit. Given the fact that the HomeReady program has no direct influence on closing costs, the 3 percent credit takes the form of a document that is submitted to the realtor at the time of closing. This can help offset some of the expenses that quickly begin to accrue during this phase of the home purchasing process.
The FHA loan assistance program does not currently offer assistance with closing costs. However, they do provide helpful guides for buyers on how they may be able to negotiate with property sellers or their actual lenders in order to reduce these expenses. Since closing costs are not directly associated with a mortgage lender, there is only so much that can be done by the FHA to dictate how these terms are settled.
Strictly in terms of cost, the fact that an FHA loan requires an upfront mortgage insurance premium could elevate the price beyond that of the HomeReady program in a direct side-by-side comparison.
Final Thoughts to Consider
As can be seen, the FHA and HomeReady mortgage assistance platforms provide a high degree of financial support and flexibility for homebuyers. Ultimately, the decision to choose one program over another will be based not only on the inherent preferences of the buyer but also their current financial credentials.
Wherever you may currently stand on the path toward buying a home, you may benefit from speaking directly with a financial adviser to gain a more detailed understanding of the cost benefits for various mortgage opportunities, including conventional loans. Highly qualified borrowers should not shy away from standard private mortgage loans, particularly if they have the resources on hand to make a 20 percent down payment.
While this process may seem somewhat intimidating, the end result more than justifies the hard work that leads to the moment where the sale is closed and you get the keys to your new home.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community.