For many, purchasing a fixer upper is an exciting decision. It not only provides the ability to transform the property into your dream home, but also means you can earn equity fast as you add onto the property. Renovations, however, can get a bit pricey so it’s important to choose a mortgage that works best for your financial situation. But which purchase and renovation loan is right for you: FHA 203K or Fannie Mae HomeStyle? Let’s take a closer look.
FHA 203K
FHA 203K loans are basically government-backed loans offered to borrowers looking to purchase damaged or older homes and make repairs to fix them up. It consists of one loan; so once the purchase of the home is closed, renovation funds are held in escrow to pay for pre-determined renovation work done by approved renovation contractors.
There are two kinds of FHA 203k loans:
- Standard: This type of loan is offered for properties needing structural repairs, garage additions, or landscaping. The minimum amount you can borrow with this loan is $5,000.
- Limited: This second option is provided to homes requiring new roofing or appliances, non-structural repairs, or energy conservation improvements. It allows you to get a loan for the purchase price of the property, as well as up to $35,000 with no minimum repair cost.
Neither program will cover any unnecessary, or “luxury”, repairs. This means the loan will not cover pool or tennis court additions, as well as any types of improvements that are not permanent; however, the FHA 203K loan does offer alternative benefits, including:
- The ability to qualify with lower income
- Lower credit score requirements
- Down payment options of as low as 3.5 percent
Overall, this loan option has become a popular choice for a variety of borrowers. With lower income, credit score, and down payment options, it’s a great mortgage for borrowers of many financial backgrounds.
Fannie Mae HomeStyle
Similar to the FHA 203K, the HomeStyle Renovation Loan Program is an easy and economical way for borrowers to purchase and renovate (or even refinance and renovate) a home without the hassle of getting a second mortgage or home equity line of credit. The approved loan amount is based on the home's "as-completed" value, rather than its current value.
The HomeStyle Renovation Loan will help you finance the renovation of a primary home, secondary home, or even investment property - unlike the FHA 203K. With higher conforming loan limits, you will have the resources to fund large projects like:
- Remodeling rooms in the home
- Making energy-efficient improvements throughout your home
- Adding or renovating a garage
In addition to large-scale projects, this loan option will cover luxury items that many alternative loans will not, like the construction of a tennis court or pool. All renovations, however, must be permanently affixed to the property and add value to the home. Benefits of the Fannie Mae HomeStyle include:
- Down payment options of as low as 5 percent
- No upfront mortgage insurance premium
- Mortgage insurance automatically cancels once the borrower acquires 22 percent equity
- Higher loan limits
The Fannie Mae HomeStyle can therefore be the better option for many large renovation projects.
Overall, the FHA 203K and Fannie Mae HomeStyle are both great options for a purchase and renovation loan. For more information about either mortgage, or to learn more about home financing in general, contact one of our mortgage specialists today. If you would like to learn more about renovation loans, check out our eBook The Introduction to Renovation Loans.
