If you want to buy a home that needs fixing up, you probably won’t get traditional financing. Conventional and government-backed programs will not fund if the home does not pass an appraisal because the home is not livable. The good news is that there are two options that help you purchase and renovate a home. These options are the FHA 203K loan and the Fannie Mae HomeStyle loan.
How Home Renovation Loans Work
When you borrow money with either of the above home renovation loans, you borrow money to purchase and fix up the home all in one loan. The appraiser determines not only the current value of the home as it is, but also the future value of the home given the proposed renovations. The program then lends you money based on that future appraised value.
Both the FHA 203K and the Fannie Mae HomeStyle loan require only one closing. You close on the loan and the seller is paid, just like in a standard home purchase. The remaining funds go into an escrow account, which the lender oversees and disburses as agreed in the contract with the contractor. The final disbursement is not made until the lender or the lender’s inspector evaluates the work and ensures that it is complete.
What are the Differences?
Now that you know both the Fannie Mae HomeStyle loan and the FHA 203K loan do the same thing, you probably wonder how they differ.
For starters, the FHA loan has less stringent underwriting guidelines. Typically, this means lower credit score requirements and they allow higher debt ratios. This is right along the lines of regular FHA loans, as they have flexible guidelines that are easier to qualify for than the conventional guidelines.
The HomeStyle loan is also known for its lower insurance premiums. If you put less than 20% down on the home, you have to pay PMI, just as you would with a regular conventional loan. The exact amount you pay depends on how much money you put down and your credit score. Generally, though, borrowers pay less for PMI than they would mortgage insurance on the FHA loan.
The larger differences, though, come into play when looking at the allowed properties and uses for the loan. The FHA 203K loan is strictly for owner-occupied properties. Even if a home is owner-occupied, the FHA does not allow any of the funds to be used for any type of luxury renovations. Because the lender has to approve all renovations, there’s no getting around this requirement.
With the HomeStyle loan, though, you can use the loan on any type of home whether it’s owner-occupied, a second home, or an investment property. The HomeStyle loan also does not put any type of restrictions on the type of renovations you can make, including the allowance of luxury renovations.
Which Loan Should you Choose?
Knowing that the Fannie Mae HomeStyle loan might come out with a cheaper monthly payment, it may seem like the obvious choice, but that’s not always the case. If you have a lower credit score or higher debt ratio, you are better off with the FHA 203K as it has more flexible guidelines.
It comes down to your qualifying factors and the type of home you need to renovate. If you are renovating anything but an owner-occupied property, you have no choice but to use the HomeStyle loan. If you are renovating an owner-occupied property, though, you can choose between the two programs. We suggest you obtain quotes for both loans and compare the interest rate, closing fees, and APR. Looking at the total cost of both loans, including the cost of the mortgage insurance over the life of the loan will help you understand which loan cost the least.Click to See the Latest Mortgage Rates»