While 203(k) loans may be the most popular home renovation and purchase loan on the market, the Fannie Mae HomeStyle loan is also growing in popularity. However, these two loans aren’t the only one-and-done home purchase/refinance and renovation loans out there. Fortunately for borrowers, Freddie Mac also offers the Freddie Mac Renovation Loan. In this article, we’ll review the basics of Freddie Mac Renovation Loans and compare them to the other purchase and renovation loans available to borrowers, including the FHA 203(k) loan.
FHA home loans are some of the most popular kinds of home mortgages in the U.S. They’re available for almost everyone, provided that you live/work legally in the U.S. and have a credit score of at least 500. In contrast, VA loans are only available to current and former U.S. service members and, in some cases, their surviving spouses. If you qualify, a VA loan can offer some substantial advantages over FHA financing, including no down payments and no monthly mortgage insurance. However, even with their benefits, VA loans aren’t the best option for everyone, especially if you want to make major home renovations.
FHA loans are by far the most common type of mortgage guaranteed by the U.S. government, but they’re not the only government-guaranteed loan option on the market. USDA loans actually have lower interest rates, and lower average MIP (0.35% for most loans). However, unlike FHA loans, USDA loans aren’t available for everyone— only borrowers living in rural locations with eligible properties qualify. Plus, income limits also apply to USDA loans. Fortunately, the USDA also has a loan option for those who want to make repairs or renovations to their home without taking out additional financing. Just like the FHA’s 203(k) home purchase and renovation loan, the USDA escrow holdback loan permits borrowers to finance a home and renovations in one, single loan.
The 203(k) loan is perhaps the best option on the market if you want financing to purchase and renovate (or refinance and renovate) a home. While the FHA 203(k) loan has a variety of upsides, it also has downsides, too. In this article, we’ll review both the pros and cons of 203(k) loans to give you a better picture of whether this form of financing can help you get the home of your dreams.
FHA 203(k) loans are perhaps the best home loan option out there for people who wish to purchase and renovate a home without the stress and financial hassles of taking out multiple mortgages. 203(k) loans are available to a variety of different borrowers, including those who want to purchase a home and repair it, those who wish to refinance their current home and make repairs, and even people who want to buy a 2-4 unit multifamily property and live in one unit while renting the others out.
No matter what kind of home loan you decide to get, coming up with the required down payment can be a challenge. While FHA loans, including the 203(k) loan, only require a 3.5% down payment for borrowers with a credit score of at least 580, even that can be difficult for many borrowers to produce. Fortunately, all FHA loans (including 203k loans) permit the use of down payment assistance programs. However, the use of these programs is still subject to lender approval.
While finding a great 203(k) consultant and 203(k) contractor are extremely important, nothing is more important than determining what lender you will use for your 203(k) loan. Obviously, your lender is the one providing you with the funds to purchase or refinance and renovate your home, so you’ll want to make sure that you’re choosing a reputable lender with significant experience in providing loans through the 203(k) program. With that in mind, we’ve created a list of some of the top 203(k) lenders in the industry.
In your quest to get a 203(k) loan to renovate your home, one of the most important people you will work with is a 203(k) loan consultant. Your 203(k) loan consultant should be chosen carefully, as they will be the individual guiding you through many of the complexities of your 203(k) loan application and approval process, as well as the process of choosing the contractor who will actually complete the work on your home.
One of the most important requirements for FHA 203(k) borrowers is to ensure that they have a licensed general contractor to complete the work on their property. However, before enlisting the help of a contractor, you will first want to get help from a HUD-approved 203(k) loan consultant.
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 order to purchase a property with an FHA 203k loan, you will need to live in it. However, that doesn’t mean that you can’t make money off of the property. For example, if you use the loan to buy a property with 2, 3, or 4 units and live in one unit, you can rent the other 1-3 units out to tenants.
DTI, or debt-to-income ratio, is one of the key metrics that will determine whether a borrower is eligible for an 203k loan. Unlike most other FHA loans, which typically have a 43% maximum debt to income ratio, the FHA allows 203k borrowers to have up to 45% DTI. This gives borrowers a little more wiggle room when it comes to qualifying for this type of loan.
If you decide to take out a 203k loan, but you don’t like the interest rate, can you buy discount points in order to reduce it? The answer is yes. Just like for other kinds of FHA loans, most lenders will allow borrowers to purchase a certain number of mortgage points. A mortgage point allows the borrower to pay an upfront fee in order to lower their interest rate. In most cases, one mortgage point costs 1% of the total loan amount, and will typically lower a borrower’s interest rate between one-eighth and one-quarter of a percent.
If you want to get a 203k loan to renovate a property, you’ll need to have a licensed, HUD-approved property appraiser issue a full appraisal on the property. The most important function of the appraisal is to determine the estimated market value of the property. That information will be used so that your lender can calculate just how much they can lend you, based on the maximum 96.5% LTV limit for FHA loans.
You might already know that you can use an FHA 203k loan to purchase a duplex, triplex, or quadplex. However, you might not know that you can purchase a single-family home with the 203k loan and use your repair and renovation funds in order to convert the home into a multi-unit property. Since you can live in one unit and rent the rest out to tenants, this can be an incredible way to increase your income (and can even help you pay your mortgage.)
While FHA loan credit requirements aren’t as strict as the requirements for conventional loans, they still exist. And, unfortunately for borrowers with lower credit scores, most lenders have higher credit requirements for 203k loans than other FHA loans, such as the 203b loan. This is because 203k loans are considered significantly riskier than other types of FHA loans, since they involve property repair or renovation.
FHA loans, including the 203k loan, are generally offered to specific subsets of the American population, notably those who are not good fits for conventional loans. These programs exist to help ensure that all Americans can purchase a home to call their own. However, each loan program differs to some extent in terms of those who will benefit from them.
The 203(k) loan is a subtype of the standard FHA loan, or 203(b). What this means is that most of the rules that apply to other types of FHA loans also apply to 203k loans. In most cases, you are only allowed to have a single FHA loan at one time. This is especially the case for 203(k) loans, since additional funds for home renovations have been added to the total loan amount.