Renovation Loans: FHA 203(K), Fannie’s Homestyle Renovation Mortgage, and Conventional Rehab Loans

With a plethora of homes still being sold as short sales and foreclosures, renovation loans are becoming increasingly popular among homebuyers. Many single-family homes are being remodeled for additional family members these days. As rental costs rise, families choose to live together and save money. There are several situations that could apply: boomerang children, aging parents or divorced parents with grandchildren – the family home needs to be expanded or renovated to accommodate everyone comfortably.

Rehab loans like the FHA 203(k) program or the Fannie Mae HomeStyle Renovation Mortgage are also the perfect answer for some first-time homebuyers. If the borrower qualifies for the 203(k) program, the buyer can obtain a loan based on the projected value of the home after the home rehabilitation is complete.

I’ll summarize some common home renovation loans that are available to consumers and some of the requirements for each. Interest rates may vary for each loan listed. Therefore, before beginning your home buying or refinancing process, consult a qualified loan officer first.

Home improvement loans are effective for consumers, banks, and mortgage lenders because they provide the resources necessary to market and repeat foreclosures. Additionally, these loans offer first-time home buyers (which historically accounted for 30-40% of a healthy housing market) the opportunity to renovate before moving in.

FHA 203(k) Rehab Loans

FHA-insured home renovation loans are more popular today than ever due to the desperate need for resources for home renovations. A streamlined 203(k) loan involves less than $35,000 in home renovations. A full 203(k) is required for homebuyers requiring rehab work greater than $35,000.

To qualify for the FHA 203(k) loan, the borrower must agree to hire a real estate consultant to evaluate the construction plan and sign off on each phase. The project must be completed in six months, with five draws (or payments to contractors) allowed. A list of approved renovation works is attached to the loan. For many borrowers, this loan is too complicated – or the renovation list is too limited for their projects. But the interest rate on FHA loans is low enough to make it worthwhile.

If you are interested in an FHA 203(k) loan, find a mortgage broker experienced in this type of rehab loan to complete the transaction. FHA loans are typically available for owner-occupied housing. These loans are federally insured and have a more expensive Mortgage Insurance Rate (PMI) compared to other loan products with a 1.75% upfront payment and 1.35% monthly payment. Jeff Hurd, a mortgage banker at Fidelity Bank Mortgage in Newport News, Virginia, said, “With traditional rehab loans, the consumer has the option of paying the entire PMI monthly in advance or having the lender pay it (LPMI).”

Fannie Mae’s HomeStyle Renovation Mortgage

Comparing the Fannie Mae HomeStyle loan to the 203(k), Hurd says the HomeStyle loan product offers more flexibility in repairs and renovations and in the types of homes purchased. The Fannie Mae HomeStyle Loan offers a wider range of home renovation projects and can be used for a second home, an investment property, or a primary home.”

Other benefits of the Fannie Mae HomeStyle Renovation Mortgage include a lower down payment than traditional rehab loans (minimum 5%) and lower mortgage insurance costs. Monthly mortgage insurance payments are reduced with higher down payments and/or a good credit score above 680. Traditional homestyle typically offers a PMI price advantage over FHA. With Fannie Mae’s HomeStyle Renovation Mortgage, home purchases and improvements can be combined into one loan for virtually any property — and it doesn’t have to be Fannie Mae’s property. The repairs or renovations must be permanently linked to the structure and add value to the property. Lenders must be pre-approved to sell this product. Therefore, be sure to ask the loan officer if he or she participates in this home equity program.

Rehab Loans – the time is now

Now is a good time to buy a home with a rehab loan. There are so many homes that can be in need. Whether the house is owned by a bank, or it’s in foreclosure, a short sale, or a homeowner is upside down and doesn’t want to put the money into a property to fix it, there are houses to choose from. Right now homebuyers have a good opportunity to buy a house cheaply and renovate it with the financing. These rehab loan products make it easier to buy a home and simultaneously complete rehab projects before the move-in date. Chances are a consumer can buy a property, make the necessary renovations, and exit the transaction with equity in the home. Hurd says, “There is a market with savvy consumers who are ready to buy these homes now.”

The housing market has changed enormously in the last five to seven years. Since there are still vacancies in this real estate market, rehabilitation loans are a means of obtaining these properties in need of renovation. Homebuyers can now expand their choices of homes to live in because they can remodel to fit their needs. Real estate investors can buy, renovate and rent out the property or resell it.

Rehab loans are a great stimulus to the real estate market and a great way for homebuyers to buy what they want without worrying about liquidating cash investments or spending tens of thousands of dollars on top of a mortgage to fund home renovations.