Renovation Loans: FHA 203(K), Fannie 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 with homebuyers. Many family homes are being redesigned for additional family members these days. As rental housing costs rise, families decide to live together and save money. There are multiple situations that could apply: boomerang kids, elderly or divorced parents with grandchildren – the family home needs expansion or renovation to ensure everyone is comfortable.
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 borrow based on what the home is expected to be worth after home rehabilitation is complete.
I’ll outline some common home renovation loans available to consumers and some of the requirements for each. Interest rates are subject to variation for each itemized loan, so be sure to check with a qualified loan officer first before embarking on a home purchase or refinance.
Rehabilitation loans are effective for consumers and banks and mortgage companies because they offer the necessary resources to take foreclosures off the market and redo them. Additionally, these loans give first-time homebuyers (who have historically accounted for 30-40% of a healthy housing market) the opportunity to renovate before they move.
FHA 203(k) Rehab Loan
FHA-insured home renovation loans are more popular now than ever, because the resources for renovations are sorely needed. A simplified 203(k) loan includes less than $35,000 in renewals. For homebuyers who need more than $35,000 in rehab work, a full 203(k) is required.
To qualify for the FHA 203(k) loan, the borrower must agree to hire a real estate consultant to evaluate the construction plan and approve each phase. The project must be completed in six months, with five withdrawals (or payments to contractors) allowed. A list of approved property renovations is included with the loan. Many borrowers feel that this loan is too complicated, or that the renewal list is too narrow for their projects. But the interest rate on FHA loans is low enough to be worth it.
If you are interested in an FHA 203(k) loan, find a mortgage broker experienced in this type of rehabilitation loan to complete the transaction. FHA loans are typically available for owner-occupied residences. These loans are government insured and have a more expensive PMI rate, with a 1.75% down payment and 1.35% monthly payment, compared to other loan products. Jeff Hurd, mortgage banker at Fidelity Bank Mortgage in Newport News, Virginia, said, “With conventional rehab loans, the consumer has the option of paying all of the PMI up front, monthly, or having the lender pay it (LPMI).” .
Fannie Mae HomeStyle Renovation Mortgage
Comparing the Fannie Mae HomeStyle loan to the 203(k), Hurd says the HomeStyle loan product offers more flexibility with repairs and renovations and in the types of homes purchased. The Fannie Mae HomeStyle loan offers a broader range of renovation projects and can be used on a second home and investment property, as well as a primary residence.”
Other advantages of the Fannie Mae HomeStyle Renovation Mortgage include less money down than conventional rehab loans (a minimum of 5%) and less cost for mortgage insurance. Monthly mortgage insurance payments are reduced with higher down payments and/or a good credit score above 680. The Conventional Homestyle will generally have a PMI pricing advantage over FHA. With the Fannie Mae HomeStyle Renovation Mortgage, home purchases and improvements can be combined into one loan for virtually any property, and it doesn’t have to be owned by Fannie Mae. Repairs or renovations must be permanently affixed to the structure and add value to the property. Lenders must be pre-approved to sell this product, so be sure to ask the loan officer if he or she is participating in this home financing program.
Rehab Loans: Now is the Time
Now is a great time to buy a home with a rehab loan. There are so many houses that can be in danger. Whether the home is bank owned, in foreclosure or short sale, or the owner is upside down and doesn’t want to put the money into a property to fix it up, there are homes to choose from. Right now, homebuyers have a good opportunity to purchase a home at a great price and renovate it with financing. These rehab loan products make it easier to buy a home and complete home rehab projects at the same time, before your move-in date. The chances that a consumer will be able to purchase a property, make the necessary renovations, and come out of the transaction with home equity are excellent. Says Hurd, “There’s a market of savvy consumers ready to buy these houses now.”
The real estate market has changed tremendously in the last five to seven years. Because there are still vacant properties available in this real estate market, rehab loans are a means of obtaining these properties in need of repair. Homebuyers can now expand their options for homes to live in because they can remodel to fit their needs. Real estate investors can buy, rehabilitate and rent or resell the property.
Rehab loans are a great stimulus to the real estate market and a great way for homebuyers to buy what they want without having to worry about liquidating cash investments or having tens of thousands of dollars plus a mortgage to fund home renovations. households.