All renovation projects begin with the same question: “How do I pay for my repairs?” Your first stop for long-term market rate financing should be the FHA 203k and the Fannie Mae HomeStyle loan. Both financing vehicles offer special features for both home purchases and refinance transactions. A borrower should compare these programs the same way one would compare carpet to wood floors or single-hung to double-hung windows. Details for both the FHA 203k and the Fannie Mae HomeStyle (some lenders call the HomeStyle product their “conventional renovation loan”) are listed above on the navigation bar, but I thought I would break out a few items that might help you initially address which program might be best for your renovation project.
203k and HomeStyle Renovation Credit Processing
| FHA 203k | Fannie Mae HomeStyle | |
|---|---|---|
| Mortgage Insurance | 1% of the loan amount is calculated and financed on to the loan (it may be paid in cash, but that option is seldom chosen); for a 3.5% down 30-year loan an additional 1.15% is calculated (divide by 12 payments) and paid monthly as part of your total payment. Monthly mortgage insurance is generally applied to all FHA loans (15-year loans have different parameters) with no respect to the loan-to-value. | There is no up-front mortgage insurance, and the monthly payment averages between .70-.80% of the loan amount (for 5% down). As a borrower places more money down, the monthly mortgage insurance decreases until a borrower has reached a down payment of 20%, then no mortgage insurance is applied. If a borrower is refinancing and has equity in his home, the same principle applies: More equity = less mortgage insurance. |
| Maximum Loan Limits | In non–high balance loans area, the maximum FHA loan amount is $271,050. | In non–high balance loans area, the maximum conventional loan amount is $417,000. |
| Downpayment | 3.5% minimum (may come from a gift) | 5% minimum (must be the borrower’s own funds) |
| Credit Scores | For owner-occupied properties, the minimum median score is 620. (This score should be used only as a yardstick. Property location, high-balanced loan limits, and other factors may affect this number.) | For owner-occupied properties, the minimum median credit score is 660. (This score should only be used as a yardstick. Property location and type, high-balanced loan amounts, and other factors may affect this number.) |
| Cash Reserves | No requirements for reserves. | Must have a minimum of two months PITI with additional reserves needed for high-balance loans, second homes and investment properties. |
203k and HomeStyle Renovation Property Standards
| FHA 203k | Fannie Mae HomeStyle | |
|---|---|---|
| Appraisals | A lender can loan up to 110% of the appraised value. | A lender can loan up to 100% of the appraised value. |
| Luxury Repairs | No luxury items allowed; only $1,500 toward pool repair. | Luxury items allowed, including renovating or putting in a new pool. |
| Property Types | Owner-occupied homes only. | Owner-occupied homes, second homes, and investment properties. |
Remember: A more detailed description for each loan program is listed on the navigation bar above.
The guidelines listed above are generic, so consult your 203k or HomeStyle lender on their specific program parameters. Don’t forget that, in today’s lending environment, more and more lenders are placing overlays on their products. If you believe you fit within the one of these program parameters, don’t give up on your project after one negative lender conversation; make a couple of additional calls to confirm what you have been told.
Remember: I lend nationwide and can be reached by phone at 1-800-689-6001 or e-mail at info@203kkc.com.
