If you want to buy a house that is run down and won’t pass an appraisal, you probably think of the FHA 203K loan as an option. This loan program gives you the funds to purchase and renovate a home so that it will pass the FHA appraisal. You can even make cosmetic changes to the home if there’s room in the loan. What if you don’t want the FHA 203K loan, though? Are there other options?
Fannie Mae HomeStyle Loan
The Fannie Mae HomeStyle loan is a conventional loan. It has tougher requirements than the FHA 203K loan has because it’s a conventional loan.
In order to qualify, you need:
- At least a 680 credit score
- A maximum 28% housing ratio (your housing payment doesn’t exceed 28% of your gross monthly income)
- A maximum 36% total debt ratio (your total debts don’t exceed 36% of your gross monthly income)
- Proof that you have the income to afford the loan and that the income is stable and consistent
- Proof that you have stable employment (a 2-year history works best)
- No foreclosures or bankruptcies in the last 2 years
The Fannie Mae HomeStyle loan has the same idea as the FHA 203K loan. You borrow money based on the after-improved value of the home. The appraiser figures out this amount by taking into consideration the current state of the home as well as the plans you have to renovate it. The lender then allows you to borrow up to 115% of the after-improved value based on what you can afford.
If you go this route, the lender will disburse the funds as follows:
- The lender will pay the seller at the closing as they would with a traditional purchase loan
- The lender will hold onto the remaining funds, placing them in an escrow account
The lender will pay the funds that sit in the escrow account according to the contract they drew up with the contractors before you closed on the loan. Typically, the lender will disburse some funds initially if the contractor needs the funds to purchase materials. Lenders typically then don’t disburse further funds until the project is 50% complete and then again at 100% completion.
Cash Out Refinance
If you already own the home that you want to fix up and you have equity in the home, you may just qualify for a cash-out refinance. Each loan program has a cash-out program that allows you to tap into your home’s equity. Typically, you can borrow up to the following amounts:
- FHA loans – You can borrow up to 85% of the home’s value
- Conventional loans – You can borrow up to 80% of the home’s value
- VA loans – You can borrow up to 100% of the home’s value
The only stipulation that may make it difficult for you to secure a cash-out refinance is passing the appraisal. If your home is in decent condition, but you just want to make some renovations, the cash-out refinance can be a good option. If the home is in disrepair, though, you may have to stick with one of the rehab loans, whether it’s the FHA or Fannie Mae option.
Home Equity Loans
Another way to get funds you need to renovate your home if you already own it is with a home equity loan. There are two ways you can get a home equity loan (2nd mortgage):
- Home equity loan – This is a 2nd mortgage that provides you with a lump sum based on your home’s value. You make principal and interest payments and typically pay the debt off in 20 years. You cannot reuse the funds once you pay them back.
- Home equity line of credit – This is also a 2nd mortgage, but it works like a credit card line of credit. You borrow the line of credit and use the funds as you need them. The funds you don’t use sit in an account. You only owe interest on the money you withdraw (use). This occurs for 10 years. After the initial 10 years, you pay principal and interest back on any outstanding funds and you cannot draw the funds any longer.
The FHA 203K loan is a great rehab loan, but you have other options as well. Even if you want to purchase a rundown home, you can use the Fannie Mae HomeStyle loan if you qualify. Check out all of your options and weigh the costs of each to help you determine which loan is right for you.Click to See the Latest Mortgage Rates»