If you’re struggling to find an affordable move-in ready home, consider looking at fixer-uppers. This expands your options and opens up the opportunity to secure a renovation loan. Two great choices are the FHA 203(k) loan and the Fannie Mae HomeStyle loan. These loans allow you to purchase a home and make renovations. Plus, you can start your home improvements right after closing on the loan.

Expand Your Options

Renovation loans expand your homebuying choices, enabling you to purchase fixer-uppers and promptly address repairs. These loans cover structural repairs, cosmetic enhancements, and in-between improvements.

For instance, structural repairs encompass essential work to render a home livable, such as replacing copper plumbing and electrical wiring that deteriorated during a vacant period. Adding a room falls under structural renovation.

Cosmetic renovations involve upgrades like replacing outdated kitchen cabinets, while an in-between improvement example is a roof replacement.

203(k) and HomeStyle Loan Programs

Most renovation mortgages fall into two categories:

  • FHA 203(k) loans: These are mortgages backed by the Federal Housing Administration.
  • HomeStyle loans: These are mortgages supported by Fannie Mae.

Both of these renovation loans exhibit several commonalities:

  • The funds are flexible for major structural repairs and cosmetic enhancements, individually or in combination.
  • Renovation activities occur post-loan closure, not beforehand.
  • In case you can’t reside in the property during renovations, you may include up to six months of mortgage payments in your loan amount, enabling you to pay for the mortgage on the new home while living elsewhere.
  • Renovation funds are allocated in an escrow account, with contractors receiving payments in stages upon reaching project milestones.
  • The minimum necessary down payments are determined by either the total purchase cost including renovations or by the anticipated appraised value of the property post-renovation. Each loan type employs a specific calculation to determine the applicable criteria.

Differences Between 203(k) and HomeStyle Financing

Differences between FHA 203(k) loans and Fannie Mae HomeStyle mortgages lie in their flexibility and strictness. FHA 203(k) loans are more forgiving on credit scores but impose stricter rules on renovation projects. On the other hand, Fannie Mae HomeStyle mortgages are stricter on credit scores but offer more leeway in renovation options.

Here’s a breakdown of the distinctions:

  • Credit requirements: FHA 203(k) loans can accommodate borrowers with credit scores of 500 or above, whereas HomeStyle loans require a minimum score of 620.
  • Down payments: FHA 203(k) loans demand a minimum down payment of 3.5% for credit scores of 580 or higher, increasing to 10% for scores between 500 and 579. HomeStyle loans, on the other hand, necessitate a 3% down payment for owner-occupied homes with at least one first-time buyer. Exceptions apply for HomeReady loans, subject to income limitations, with a standard minimum down payment of 5%.
  • Eligible improvements: FHA 203(k) loans restrict luxury upgrades like new swimming pools or outdoor features deemed unnecessary. HomeStyle loans are more flexible, permitting a wider range of improvements as long as they are permanently affixed to the property.
  • Property types: FHA 203(k) loans are designated for primary residences, excluding vacation homes or investment properties. HomeStyle mortgages can fund renovations for second homes or investment properties, expanding the scope of eligible properties.
  • Construction stages: FHA 203(k) loans require homes to be completed for at least one year, while HomeStyle loans can cover the final 10% of construction for new homes nearing completion.