The source apparently comes from somewhere in Apple's supply chain and has spoken to DigiTimes, claiming that the iPhone 7 has completed its third round of testing with both waterproofing and an intriguing new home button.
Supposedly the home key will be more of a sensor than a button, so you won't need to push it, just rest your finger on it, but it might also be pressure sensitive like the 3D-Touch screen on the iPhone 6S.
DigiTimes isn't the most consistent rumor-monger when it comes to Apple's plans, but with a number of other leaks, rumors and even a patent pointing to a waterproof iPhone it's starting to look quite likely, especially as the iPhone 6S is more water resistant than you might expect.
The home button rumor is more questionable, but there's been talk in the past that Apple might do away with the home button altogether at some point, so this could be a step in that direction.
As the iPhone 7 is a numbered phone rather than an 'S' model tradition dictates that it should undergo some serious changes, so both of these rumors could be true. We'll probably find out for sure in September, as that's the likely launch date of the iPhone 7, but expect plenty more leaks between now and then.