The Cheapest Way To Fund A Renovation
Today’s mortgage programs let buyers purchase and rehab a home with one loan.
That’s good news for home buyers who want to save money and earn instant equity with a “fixer” home.
Both Fannie Mae’s Homestyle® loan and the FHA 203K renovation mortgage allow you to borrow based on the improved value of the property. That means a higher loan amount to cover renovation costs so you can pay less out-of-pocket.
At today’s low mortgage rates, this is about the cheapest possible way to fund a major home renovation project.
Both loans are “one-time-close” mortgages. That means you apply for a single loan, with one set of documents and closing costs. Some other renovation loan programs require a construction loan upfront, and a refinance later.
But how do you decide between these two good options? Your decision depends, first, on the property, and second, on your credit and income profile.
Weighing Renovation Loan Benefits
In general, the FHA 203K program has more flexible guidelines for the borrower. But, it has stricter guidelines for the property.
For instance, borrowers can have lower FICO scores and higher debt-to-income ratios. FHA loans in general are more lenient than conventional loans in this way. But the property must be a primary residence, and “luxury” improvements cannot be financed.
The conventional HomeStyle® loan, on the other hand, allows you to finance primary, vacation, and rental properties. In turn, it requires higher credit scores and lower debt-to-income ratios.
HomeStyle®: Lower Mortgage Insurance Costs?
Many home buyers who are putting less than 20 percent down choose the Fannie Mae HomeStyle® program for its mortgage insurance guidelines.
You can put as little as five percent down with this loan. Any downpayment below 20 percent will require private mortgage insurance (PMI), but it could be cheaper than that of FHA.
For one, HomeStyle® does not require an upfront mortgage insurance premium. FHA comes with an upfront fee of 1.75 percent of the loan amount, wrapped into the total mortgage. That’s $1,750 for every $100,000 borrowed.
HomeStyle® monthly mortgage insurance may cost less, too. It varies based on downpayment and credit score. insurance, though, does not get cheaper with higher credit scores.
Home buyers with good credit and a healthy downpayment may choose HomeStyle® for its lower PMI cost.
And, conventional loan PMI can be canceled.
Homestyle® mortgage insurance drops off, by law, once you’ve acquired 22 percent equity. FHA mortgage insurance is permanent, unless you refinance to cancel your FHA MIP.
Homestyle® Loans More Flexible Than FHA — Sometimes
Home buyers can do more with a Fannie Mae HomeStyle® mortgage. While FHA is more flexible with its credit and income standards, HomeStyle® is lenient on how you can use it.
For instance, there are no restrictions on property occupancy status. You can finance a primary residence, rental property, or vacation home. FHA allows primary residences only.
In addition, the following advantages come with HomeStyle® Loans.
- No restrictions on the type of improvements
- Higher loan limits
- Combine HomeStyle® with Fannie Mae’s HomeReadyTM program
The HomeReadyTM loan is a three-percent-down loan option with ultra-flexible underwriting guidelines. Buyers can qualify using income from non-borrowing members of the household.
Income from roommates and even non-cohabitating borrowers can help the buyer qualify.
If you qualify for Fannie Mae HomeStyle®, you may find it the better option.
When To Choose FHA 203K
Sometime your best — or only — option is the FHA 203K. That’s not a bad thing. FHA is wildly popular among home buyers.
The 203K renovation program comes with many advantages.
- Qualify with lower income
- Renovate a condominium more easily
- Make a 3.5 percent downpayment, compared to HomeStyle’s® 5 percent
Perhaps the biggest advantage with FHA’s renovation loan is the credit score requirement.
FHA’s minimum FICO score is significantly lower, at 580. The Homestyle® minimum FICO score is 620, although most lenders will require an even higher score.
The HomeStyle® and FHA 203K are both good options. The choice depends on your situation. Either loan will help you pick up a home at a very reasonable cost, then renovate it to your tastes.
And you might build serious equity while you’re doing it.
What Are Today’s Rates?
Renovation loans come with low rates like most other mortgages today. Financing home repairs has seldom been cheaper than it is right now.
Get a rate quote for your home purchase and renovation project. No social security number is required to start, and all quotes come with access to your live credit scores.