FHA 203(K) Loan vs Fannie Mae HomeStyle Renovation Loan
If you’re a home buyer considering purchasing a fixer-upper, or a homeowner in need of some repairs or renovations, you might be worried about how you’ll finance the work that needs to be done. The most common solution for both home buyer and homeowner alike is to tackle the issue head-on by getting a second mortgage, such as a home equity loan or a home equity line of credit. While a second mortgage would definitely help get the job done, it’s still a second mortgage that must be applied for, approved for, and paid separate and apart from the first mortgage, which is usually a beast of a monthly payment to have to contend with.
It wasn’t until fairly recently that home buyers were treated to another option for handling the expenses of rehabilitating or renovating a home, without having to go through the trouble of taking out a second loan. This new breed of loan allows buyers and homeowners to get a home loan that covers both the cost of the home itself and any rehabilitation or renovation costs as well. The hassle of closing two loans and making two separate monthly mortgage payments just to get some work done on a property is a thing of the past.
Both the FHA 203(k) loan and the Fannie Mae HomeStyle Renovation loan are top contenders for loans that allow borrowers to get some work done on a home without having to take out a second mortgage. Of course, each has its own set of benefits and drawbacks to it, but the end result is more or less the same.
What is the FHA 203(K) Loan?
The Federal Housing Administration is well known for insuring affordable home loans with flexible eligibility requirements. For purchase and improvement, the FHA offers the 203(K) loan program. With an FHA 203(K) loan, borrowers are able to either purchase a home or refinance an existing mortgage and borrow extra to be used for rehabilitation or renovations within the guidelines of the 203(K) program.
FHA 203(K) loans have all of the same awesome benefits that made FHA loans popular among first time home buyers and borrowers who could not qualify for conventional loans. The FHA’s well known 3.5% down payment requirement still applies, making it a super affordable way for home buyers to feel confident in purchasing a home that could use some handy work.
What is the Fannie Mae HomeStyle Renovation Loan?
Conventional loans have long been a dominant force in home finance, even though they are generally harder to qualify for. Fannie Mae changed all of that with a line of awesomely affordable HomeReady, HomePath, and HomeStyle mortgage products. The HomeStyle Renovation loan falls into this group as a strong competitor in the purchase and improvement loan category.
HomeStyle Renovation loans can also be used to refinance or purchase a home, while allowing extra funding to be borrowed to complete predetermined rehabilitation or renovations. While eligibility may be a little more strict than its FHA competitor, the HomeStyle Renovation loan only requires a 5% down payment, which is still leaps and bounds better than the 20% typically required of conventional financing options.
Comparing the FHA 203(K) Loan with the Fannie Mae HomeStyle Renovation Loan
Arguably two of the best loan options when it comes to repairing or renovating a home, the FHA 203(K) loan and the HomeStyle Renovation loan share a lot of common ground. Still, they do have a lot of differences worth considering when trying to choose between the two. Luckily, the home.loans team has taken the time to get the details of each and break down the strengths and weaknesses of both to help any home buyer or homeowner on the market for a purchase and improvement loan make the right choice.
Let’s Get started, shall we?
Credit Requirements
FHA 203(K) Loan: The golden standard when it comes to flexible eligibility requirements is an FHA loan. Borrowers with credit scores as low as 580 are eligible for FHA financing. Borrowers with credit scores between 500 and 579 are also eligible -- providing they make a larger down payment.
Fannie Mae HomeStyle Renovation Loan: For all of its benefits, the HomeStyle Renovation loan is still subject to conventional underwriting standards. While some lenders will accept scores as low as 620, the general standard credit score for eligibility with the HomeStyle Renovation loan is no lower than 640.
Down Payments
FHA 203(K) Loan: As with FHA loan standards, 203(K) loans are available to borrowers with only a 3.5% down payment, so long as they have a credit score of at least 580. Borrowers with credit between 500 and 579 may also qualify, however they are required to make a down payment of at least 10%.
Fannie Mae HomeStyle Renovation Loan: The HomeStyle renovation loan is available to borrowers with a standard down payment requirement of only 5%, which is amazing as far as conventional financing goes. Eligible first time home buyers are only required to make a down payment of 3%, and even more amazingly, borrowers who qualify for aide through the community seconds program don’t need to make a down payment at all!
Mortgage Insurance
FHA 203(K) Loan: As far as FHA loans are concerned, mortgage insurance is just about the only area that many people can find to pick at. As with all other FHA-insured mortgages, FHA 203(K) loans require mandatory mortgage insurance for any down payment under 20% in the form of a one-time, upfront mortgage insurance premium as well as a recurring annual mortgage insurance premium that is billed each month as part of the monthly mortgage payment.
Fannie Mae HomeStyle Renovation Loan: The HomeStyle loan also requires a form of mortgage insurance for any down payment amount under 20%. To help reduce the risk to lenders, borrowers who put down less than 20% on the loan are expected to pay private mortgage insurance. PMI is offered by a third party, doesn’t have an upfront portion, and can work out to be much cheaper than FHA’s mortgage insurance premiums. And the best part? It can be canceled once the homeowner has built up at least 20% of equity in the home.
Loan Terms
FHA 203(K) Loan: Borrowers can choose between a 15-year fixed rate mortgage, a 30-year fixed rate mortgage, or an eligible adjustable rate mortgage.
Fannie Mae HomeStyle Renovation Loan: Borrowers can choose between a 15-year fixed rate mortgage, a 30-year fixed rate mortgage, or a 5/1 adjustable rate mortgage.
Mortgage Limits
FHA 203(K) Loan: The FHA doesn’t typically have a standard mortgage limit, instead it varies depending on the area. Official mortgage limits can, however, be checked here.
Fannie Mae HomeStyle Renovation Loan: Like any other conventional loan, the HomeStyle Renovation loan adheres to the conforming loan limits set by Fannie Mae and Freddie Mac. As of 2018, In low-cost areas, the limit is $453,100 while in high-cost areas, the limit is $679,650.
Renovation Limits
FHA 203(K) Loan: According to the FHA, the 203(K) loan may only be used for any combination of the following:
Conversion of any sized property to a 1-4 unit structure
Alterations to structure
Modernization of a home
Improvements to the Home’s Functions
Getting rid of any Health and Safety hazard
Improving accessibility for a disabled person
Rehabilitation of plumbing system; installation of septic system or well
Alterations to physical appearance and riddance of obsolescence
Rehabilitation of roof, gutters, etc.
Rehabilitation or alteration of flooring
Any large-scale site improvement or landscape work
Improvements on energy efficiency
Fannie Mae HomeStyle Renovation Loan: Offering a much more flexible loan, the only stipulations given for usage of the HomeStyle Renovation loan are:
Cannot be used to demolish or tear down the property
Cannot be used to build a new residential dwelling on the property
Everything else is fair game!
Loan Disbursement
FHA 203K Loan: Renovation funds are held in an escrow account, and released as work is completed and inspected. A minimum of $5,000 must be used for renovations
Fannie Mae HomeStyle Renovation Loan: Renovation funds are held in an escrow account and disbursed as work is completed and inspected. Upfront draws may be released for the purposes of securing suppliers of materials, design and development fees, and permitting fees. In some cases, a “contingency reserve must be held in a separate renovation escrow account in case of any unforeseen deficiencies or repairs during the project.
Time Limits
FHA 203(K) Loan: Renovation must be finished within 6 months of closing the loan
Fannie Mae HomeStyle Renovation Loan: Renovation must be finished within 6 months of closing the loan
Eligible Borrowers
FHA 203(K) Loan: Available to anyone who qualifies for FHA financing by meeting the standard eligibility requirements of FHA loans.
Fannie Mae HomeStyle Renovation Loan: Available to individuals and families, Investors, and non-profit organizations (providing they can provide proof of their ability to repay the loan)
Work Restrictions
FHA 203(K) Loan: Work must be completed by licensed contractors who are approved by the FHA. You cannot complete any portion of the work yourself.
Fannie Mae HomeStyle Renovation Loan: Work must be completed by licensed contractors who are approved by the lender. A portion of the work not exceeding 10% of the “as-completed” value of the home may be completed by the borrower.
Eligible Property Types
FHA 203(K) Loan: Eligible property types include:
A single-family home
1-4 unit homes built at least a year ago (such as town homes)
1-4 building condos in need of interior improvements only
Modular units and even homes located off-property that can be moved to your current site
Conversion of a single unit property in a multi-unit property
Purchase of a demolished or torn down property with a section of original foundation remaining
Fannie Mae HomeStyle Renovation Loan: Eligible property types include:
1-4 unit primary residence
1 unit second home
1 unit investment property
An approved manufactured home
Renovation funds for manufactured homes are capped at the lesser of $50,000 or 50% of the “as-completed” appraised value.
An approved unit in an eligible co-op project or condo.
These two single-closing options clearly have some amazing benefits and drawbacks when compared side by side. At the end of the day, it really comes down to the home buyer or homeowner to decide which loan works best for them. Of course, for those with low credit scores, the FHA 203(K) is the only option there is, and will not disappoint.
On the other hand, The HomeStyle renovation loan has nearly no limits on what renovations can be completed with the funding, opening up a whole new realm of possibilities. Regardless of which loan is best, they can both be invaluable when in the right hands. They are both great solutions to help you gain the confidence needed to purchase a fixer-upper, or convert a plain old house into a dream home!
We just hope that no matter which loan you choose, you get to sit back and enjoy a beautiful, habitable home, and a single monthly mortgage payment. If you still can’t decide which purchase and improvement loan works best for your situation, we’ve got you covered! Just give us a call at home.loans and we’ll connect you with one of our mortgage specialists for a free consultation, at no expense to you.