Have you decided that it is time to buy a fixer-upper? The process of buying a home that needs renovations can vary dramatically from homeowner to homeowner, but we find that many people need a home renovation mortgage loan to tackle the changes they plan to make. Two common home renovation loans are the Fannie Mae HomeStyle Renovation loan and the FHA 203k loan. Let’s take a look at the similarities and differences between these two loan programs, both of which are options at First Fidelis.
What Are the Similarities Between Fannie Mae HomeStyle Loans and FHA 203(k) Loans?
Both of these mortgage loan types allow you to buy a home and pay for the renovations on the home with just a single mortgage. With these mortgage programs, buyers can borrow against the future value of the home, which increases borrowing power compared to a traditional home equity loan or line of credit.
While there are many other options for financing the purchase of a property and making improvements, the benefit of these loans is that you can keep the loan terms together and start working on renovations right away, instead of chipping away at things as the money becomes available.
What’s the Process of Obtaining These Loans?
Obtaining one of these loans starts with getting a property valuation based on the “after renovation value,” or ARV. To do this, you will need to have a list of very specific renovations you wish to complete on the property. Before you submit these plans, you will need to hire a contractor or architect and know the budget for the project as well. The house can then be appraised based on its ARV.
Once the loan closes, your lender will place the renovation funds into an escrow account. If these funds are greater than $35,000, a HUD consultant must be hired to perform a progress inspection and authorize the release of the money.
Your lender will manage the withdrawals of money based on these inspections, which are required to determine where a project is in relation to the planned timeline. When the work has been completed, the lender will perform a final inspection, where they will check to make sure the project was completed based on the original specifications stated in the loan terms. At this point, they will release the final funds to your contractor.
What Do I Need to Apply for One of These Loans?
Before closing on either of these loans, you will need the following:
- Cost Estimate: A cost estimate is a formalized estimate from your contractor.
- Income & Asset Verifications: You will need to provide bank statements, paystubs, W2s, and tax returns for anyone who will be on the loan.
- Title Insurance & Title Report: A title report will provide your lender with a legal description of the property and many other details about the home. The insurance will help cover both the owner and lender throughout the process.
- Homeowners Insurance: Depending on the loan amount, you may need both builder’s risk and standard insurance before getting one of these loans.
What’s the Difference Between a Fannie Mae HomeStyle Loan and an FHA 203(k) Loan?
The main difference between these two loan types is that an FHA 203(k) loan is government-backed, while the Fannie Mae HomeStyle loan is a conventional mortgage. Due to FHA 203(k) loans being government-backed, they tend to have more lenient qualifying requirements for buyers.
Let’s take a deeper look at the key differences between these two loan programs:
| Fannie Mae HomeStyle Loan | FHA 203(k) Loan | |
| Required Credit Score | 620+ | 580+ |
| Max Debt-to-Income Ratio | 45% or meet Automated Underwriting System (AUS) approval | 50% or meet Automated Underwriting System (AUS) approval |
| Eligible Property Types |
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| Down Payment | 5% | 3.5% |
| Time Limits | 15 months | 6 months |
| Mortgage Insurance Premium | Required if less than 20% put down | Required on all loans; may be for the life of the loan or 11 years |
At First Fidelis, we offer a wide variety of home renovation loans; however, the Fannie Mae HomeStyle loan and FHA 203(k) loan tend to be the most popular due to the ability to add the renovation cost directly to the mortgage from the start. However, it is also important to note that there are some stipulations to the renovations you can perform under each of these loan programs.
For example, an FHA 203(k) loan will basically allow you to completely rebuild a property, as long as you can prove that the foundation can handle a rebuild. But, a Fannie Mae HomeStyle loan only covers repairs—a home teardown will not be approved.
When it comes to repairs, the FHA 203(k) loan is more restrictive, only allowing for repairs that fall into the following categories:
- Health and safety problems
- Energy-efficiency upgrades
- Repairs to make the home livable
The Fannie Mae option is less restrictive in this case. This loan allows homeowners to finance any type of repair as long as it adds value to and is permanently attached to the property, including luxury upgrades and landscaping. While things like a pool wouldn’t be approved in an FHA 203(k) loan, they are permittable under the HomeStyle loan.
Which Loan Is Right for Me?
Determining which of these home renovation loans is the right fit for you is best done with the help of your mortgage broker. Your broker will look at your credit score, down payment, debt-to-income ratio, and other factors that will determine which of these options—if either—is appropriate for your needs.
If you are considering a home renovation loan, contact First Fidelis today. Our expert team can help you find the home renovation loan that best suits your needs. Give us a call today at 913-205-9978.
