Comparing the 203(k) and HomeStyle Loan Programs
FHA 203(k) loans and Fannie Mae HomeStyle loans are some of the most popular products on the market for home purchase and renovation— but how do these loans compare? First, it may be a good idea to determine how these loan products are similar. To start, Fannie Mae Homestyle and 203(k) loans permit borrowers to borrow based on the improved value of the property, not just it's current value.
In addition, both of these products are “one-time close” purchase and renovation loans. This means that, unlike some other kinds of home purchase and renovation financing, borrowers will not have to close on two loans in order to get the funds they need. Since closing costs can be expensive, avoiding a second closing can be a huge financial benefit to borrowers. Plus, both HomeStyle and 203(k) loans allow for both purchase and renovation and limited cash out refinance (LCOR) loans. Finally, both loan types require that all renovations be completed within 6 months of closing.
Credit Requirements for 203(k) Loans vs. Fannie Mae HomeStyle Loans
Now that we understand some of the major similarities between FHA 203(k) loans and Fannie Mae HomeStyle loans, let’s take some time to look at how they differ. One of the main differences between these loans is the fact that, since 203(k) loans are insured by the Federal Housing Administration (FHA), they have significantly more lenient requirements (at least in theory) than their conventional Fannie Mae counterparts.
For example, Fannie Mae loans require borrowers to have a minimum credit score of 620, while FHA loans only require a minimum credit score of 500 with a 10% down payment (580 if borrowers want to take advantage of the low down payment program). However, just because the FHA allows credit scores as low as 500 does not mean your lender will, and, since these loans are only insured by the FHA (not issued by them), it’s the lenders decision that counts. In practice, most borrowers will need a credit score of between 620 and 640 in order to qualify for FHA 203(k) financing, which actually makes the requirements relatively similar to Fannie Mae HomeStyle loans.
LTV/LTC and DTI Requirements for 203(k) Loans vs. Fannie Mae HomeStyle Loans
While we just mentioned down payments briefly, it pays to expand a bit more on the topic, especially in reference to HomeStyle loans. While FHA loans like the 203(k) permit up to 96.5% LTV/LTC, HomeStyle loans permit up to 97% LTV/LTC for first time home buyers and those using HomeStyle loans in conjunction with the Fannie Mae HomeReady mortgage program. This LTV/LTC only applies to fixed-rate loans for principal residences that only have 1 unit. 2-4 unit residences and residences making use of adjustable-rate mortgages have somewhat stricter LTV requirements: and Note: while HomeStyle loans can be used for vacation homes or investment properties, 203(k) loans are only available for primary residences.
When it comes to debt-to-income ratio (DTI), HomeStyle loans and 203(k) loans are also relatively similar. Fannie Mae permits a maximum 36% debt-to-income ratio, while a 45% debt-to-income ratio is allowed for certain borrowers who have high enough credit scores and meet the reserve requirements. In contrast, FHA DTI limits are much more lenient, with a 43% limit extended to all borrowers, without the need for additional proof of creditworthiness.
However, once again, it’s the lender who makes the final decision here, and many lenders may have stricter requirements than the FHA or Fannie Mae. In general, these limits are also flexible for both FHA and Fannie Mae loans, as borrowers may be allowed to have an up to 50% DTI as long as they have strong credit scores and financials. Despite that potential flexibility, loans for home purchase and renovation are significantly riskier than loans solely for home purchase, so you shouldn’t expect to be approved if your DTI is close to 50%, even if you’re incredibly qualified otherwise.
It may be of interest to borrowers to note that the HomeReady mortgage program, which we mentioned earlier, allows borrowers to use the incomes of those who are living with them, including family members, tenants, and others, to count as their income for their DTI ratio. In order to qualify for the HomeReady program, a borrower must not own any other residential property in the United States and must agree to take a 4-6 hour online homeowner counseling course.
203(k) Loans, Fannie Mae HomeStyle Loans, and Mortgage Insurance
As you may already know, FHA 203(k) loans, like all other FHA loans, require borrowers to pay both an annual and upfront mortgage insurance premium (MIP). The upfront MIP (UMIP) is currently set at 1.75% of the entire loan amount, while annual MIP (AMIP) rates are currently between 0.8% and 1%, depending on the size of your loan. Fannie Mae HomeStyle loans also require mortgage insurance, in this case, private mortgage insurance, or PMI. However, Fannie Mae loans do not require any upfront mortgage insurance payments, and, PMI rates are lower for borrowers who provide larger down payments and have better credit scores. In addition, Fannie Mae mortgage insurance is canceled once you acquire 22% equity in your home. In contrast, FHA MIP cannot be canceled (regardless of the amount of equity in your home), unless you decide to refinance your home.
HomeStyle Loans Can Be More Flexible Than 203(k) Loans
When it comes to home improvements, 203(k) loans have a variety of limitations. In particular, they can only be used for structural alterations, reduction of health and safety hazards, general home modernization, changes to the home’s overall appearance, floor replacements, energy conservation improvements, replacing plumbing or sewer systems, replacing roofing or gutters, or major landscaping work. In contrast, HomeStyle loans can be used for pretty much any home improvements that a borrower wants, no matter how strange or esoteric they might seem.