Most homes in the US were built before the 1990s. That’s why you won’t see many “new construction homes” out there. I just saw a listing that was constructed before 1925. It’s obvious that all these homes have been renovated over time. The house you will be buying might have been renovated a couple of times. So, today, we are talking about FHA 203k and homestyle renovation loans.

Two popular choices concerning renovation loans are:

1. FHA 203(k) loan
2. Fannie Mae homestyle renovation loan

FHA 203k and Fannie Mae homestyle loans are slightly different from each other. They both have distinct features suitable for different situations. 

The best part about these mortgages is that they are not just renovation loans. You can finance the home purchase plus the repairs. 

Why do I need a renovation loan? 

Banks don’t lend money for homes requiring repairs. You cannot get conventional financing for a home with broken windows or a damaged roof. The house has to comply with the FHA lending requirements. 

But what if you have found the perfect house that requires some repairs? Then you need to choose among renovation loans. With FHA 203k and Fannie Homestyle, you can invest in a fixer-upper. You can get an estimate for the repairs. Submit the bid to your lender and get approved for the mortgage. There are several intermediate steps involved, but let’s keep the topic brief. You will get a single loan covering both repairs and the initial purchase. 

Why is a renovation loan beneficial for investors? 

A renovation loan is often the first step for new investors. If you’ve been wanting to invest in real estate but a lack of capital has held you back, or if you don’t want to go after private money lenders, then a renovation loan provides an ideal start. You can start with a minimum down payment. You’ll have to find a distressed home. But if you have the initiative and the drive, you can put in some extra work for a steady income. I will describe it below. First, let’s discuss the highlights of these mortgage loans: 

Loan Feature	FHA 203k	Homestyle Renovation
Minimum credit score	500 (10% down), or 580 (3.5% down)	620
The minimum down payment	3.5% (credit score under 580) or 10% (credit score above 580)	5%
Loan Limit (Single-Family)	$498,257 (most areas) to $1,149,825 (high-cost areas).	$766,550 (conventional mortgage limit)
Mortgage Insurance	An annual mortgage insurance fee and a one-time fee is applied if your down payment is less than 20%.	An annual mortgage insurance fee is applied if your down payment is less than 20%.
Loan Purpose	Primary residence, including 1-4 units multifamily property	Primary residence, 1-4 unit multifamily, secondary homes and investment homes

Key Takeaway:

• Both loans allow you to lend money against the after-repair value. So if the current value is $200k, but after the repairs, the value will be $285k, then lenders will consider $285k. That’s more than a traditional home equity loan or line of credit. 

What are FHA 203K and Homestyle Renovation Loans?

A 203(k) mortgage is backed by FHA, while a homestyle loan is backed by Fannie Mae. Both loans are designed for low-income families that want to invest in a fixer-upper. The idea is to lend money for distressed homes so new homeownership opportunities can be created. 

How Can You Use FHA 203(k) for Renovating Your Next Property?

FHA 203k is reserved for renovating a primary residence. That means you need to live in the house for one year after rehabbing. You cannot sell or rent the house during that period. So FHA 203k is solely designed for first-time homebuyers or those planning to spend at least one year in the property. 

Overview of FHA 203k Loan Requirements: 

• You can qualify with a 3.5% down payment and a credit score of 500, but a 580 is preferred.
• You cannot make luxury updates to the house. It’s not possible to add a pool or other luxury features. 
• FHA 203k comes in two varieties. 
• The total amount of the mortgage must be within the limitations of a conforming mortgage. Check the maximum borrowing limit for a conforming mortgage in your county and proceed accordingly. 
• Your debt-to-income ratio must be less than 43%. 
• You can renovate single-family homes, condos, manufactured houses built after 1978, and multifamily houses (1-4 units). 

Why is a FHA 203k good for wealth building? 

Most first-time buyers are just looking at their dream of home ownership. They want a place to call home, and that’s it. But to build wealth, you need to look beyond. If you buy a house, you will need to make a down payment and continue to make mortgage payments. But there is one thing that you can do to improve your financial situation. Let me demonstrate. 

You can buy a single-family residence for $500,000 in Dallas, TX. You can also buy a multifamily property for $779,000 in Dallas, TX. The specifics of the transaction will vary. I am using those numbers for illustration purposes. 

You can finance a multifamily property using a FHA 203k loan. You will live in one of the units and other units will bring you rental income. 

Rule for Investing in Multifamily Property

The property must be self-sufficient. Now, what is a self-sufficient property? It’s a home that pays for itself. So if you buy a quadruple and live in one unit, the rental income from the other three units must be sufficient to cover your mortgage costs. Let’s do some calculations: 

To finance a multifamily property worth $779,000 with a 10% down payment at current mortgage rates, you can expect to pay $5,491 per month. Now, can you rent out the other units for $1,980 per month? That brings you $5,940, which is enough to cover your mortgage payment. You can live in the house rent-free. 

Yes, there will be times when you deal with bad tenants or vacancy rates. Look at your market condition and see if investing in a multifamily home makes sense for you. For many people, it can be the beginning of their investment career. 

How can I use FHA 203k for the renovation of a multifamily property?

You need to meet a couple of conditions: 

1. The property must be self-sufficient (we already discussed it above). 
2. You need to live in one unit for at least one year. 
3. You can renovate the property, but the total loan amount cannot exceed the maximum allowed for multifamily units. 
4. You can renovate a duplex, triplex, or quadruple. A 5-unit multifamily property won’t qualify for FHA 203k. 
5. The renovation process must begin within 30 days. The total renovation period is 6 months. So you need to rehab your multifamily property within 6 months of closing the loan. 
6. The same rules apply for single-family homes but the house doesn’t have to generate any income. 

Which renovations can I make with FHA 203k? 

The FHA 203k loan is offered in two variants. There is a limited (streamlined) version, and you can borrow $35,000 to repair your house. There is also a standard version that covers extensive repairs. Here is an overview of the repairs you can make with FHA 203(k) funds.

1. You can demolish a house and construct it from scratch if required. The money from 203k can be used to pay for a rental home while the renovation work is being done. 
2. You cannot add luxury updates. 
3. You can renovate the house to make it sellable, comfortable, and safe. 
4. For standard 203k (exceeding $35,000), an HUD consultant is involved. You will need to submit your plan, or contractor’s bid, to the consultant. Payments are gradually approved as the work is done. 
5. You cannot pay yourself for the rehab work. You cannot use 203(k) funds to repair the house, even if you are a skilled handyman. All the funds are paid directly to the general contractor. You are welcome to undertake some work, but that won’t be covered by the FHA loan. 
6. If your down payment is less than 20%, you will pay a 1.75% upfront mortgage insurance premium. There is also a monthly MIP fee worth 0.80%. 

How much money will I get with a FHA 203k mortgage?

What is the conforming mortgage limit in your area? If you are a New Jerseyan in Atlantic County, your limit is $498,257. Therefore, the maximum amount you can borrow is $498,257. That is just the upper limit. It doesn’t mean the bank will lend that much. 

Your loan amount is calculated based on the after-repair value of the house. With FHA 203(k), you can borrow up to 110% of the ARV. However, the final amount must stay within your area’s mortgage limit.

Now let’s talk about the Fannie Mae homestyle renovation loan. After an overview, we will compare both mortgages as well as their pros and cons.

What is the Fannie Mae Homestyle Renovation Loan? 

Fannie Mae HomeStyle allows you to finance home repairs along with the purchase. You need a minimum down payment of 5% and a credit score starting at 620. 

The 5% down payment is only for renovating your primary residence. For a second home, you need to put down at least 10%. And for an investment home, the down payment increases to 15%. 

Homestyle loans provide you with flexibility. You can borrow up to 75% of the after-repair value. A professional appraiser will confirm the ARV once you submit your renovation plan. 

Eligible properties and renovations

A homestyle loan is ideal for repairing vacation homes and investment properties. You can add luxury amenities such as a swimming pool. You can create additional units or renovate an existing multifamily property. 

Mortgage insurance and interest rates

For FHA 203k, you need two types of insurance: an annual premium and an upfront premium. The annual premium is 0.8%, while the upfront premium is 1.75%. For a homestyle loan, you simply pay an annual 0.4% insurance fee, which can be waived after you have 20% equity in the house. 

The Renovation Process with Homestyle Loans

You don’t need a HUD consultant. The lender will put renovation funds in an escrow account, which will be released as the work is completed. With a homestyle loan, you can invest in extensive repairs (including structural work), and you have 12 months to finish the job. 

You can also build an accessory unit, like a guest house or an apartment above the garage. The choice is yours. If you plan to sell your house after renovations, consider comparing recently sold homes in your area.

In summary, the Homestyle Renovation Loan offers a flexible way to finance home renovations. It has a longer timeline, allows for higher loan-to-value ratios, and offers more renovation options than the FHA 203k loan. Homeowners should think about their needs and finances to pick the best loan for their renovation goals.

How should I choose between Homestyle and FHA 203k? 

A homestyle loan is preferred when you are renovating a vacation home or rental property. You cannot renovate those with FHA 203k. People also choose a homestyle loan because of its structure. You can make extensive repairs without having to pay high mortgage insurance fees. FHA 203k is better considering the low down payment and credit score requirements. 

 You also need to find a lender who offers these types of renovation loans. You need to locate a distressed property that you can renovate. The whole point of investing in a distressed home is to earn a profit. 

Ideally, you should have equity in the house after renovation. Let’s say you buy a house worth $200k, you do repairs worth $80k and after repairs, the home value should go up. Let’s say your home is now worth $320k but you borrowed only $280k. That’s $40,000 in equity. 

So hopefully, this article gives you an overview of both loans. If you have any questions, please drop a comment below. 

FAQ

What are FHA 203k and Homestyle Renovation Loans?

With FHA 203k and Fannie Mae Homestyle Renovation Loans, you can finance the purchase and renovation of a property with a single loan. The loan amount is calculated against your property’s after-repair value. So you need to find a fixer-upper in a desirable neighborhood and improve the home’s value with repairs. 

What are the eligibility requirements for an FHA 203k loan?

For a FHA 203k loan, you need a credit score of at least 580 and a debt-to-income ratio under 43%. You can use it for a single-family home, condos, or manufactured homes built after 1978. Your home must be your primary residence.

What are the eligibility requirements for a homestyle renovation loan?

The Homestyle Renovation Loan requires a credit score of 620 and a debt-to-income ratio of less than 45%. It’s for buying or refinancing a home, including condos and investment properties.

How does the renovation process work with an FHA 203k loan?

For FHA 203k, you need to hire a HUD consultant for over $35,000 in structural work. They manage the project and release funds as work is done. 

How does the renovation process work with a homestyle loan?

No HUD consultant is needed. The lender holds renovation funds in escrow and releases them as work progresses. Homestyle offers up to 15 months for renovations, which is more than the 6-month timeline for FHA 203k.