MAKING YOUR DREAMS A REALITY WITH A HOME RENOVATION LOAN
COMPARE FHA 203K LOANS AND FANNIE MAE HOMESTYLE LOAN
FHA RENOVATION LOANS:
What is a FHA 203k loan?
An FHA 203k loan (sometimes called a Rehab Loan or a FHA Construction loan), allows you to finance not one, but two major items
1) the house itself, and
2) needed/wanted repairs. Because the lender tracks and verifies repairs, it is willing to approve a loan on a home it wouldn't otherwise consider.
How much in repairs can be financed and when are the funds disbursed?
There are two types of FHA 203k programs “Standard” and “Limited” with a few differences.
203k Limited is capped at $35,000 in repairs and less paperwork needed as part of the approval but does require that the home be “habitable” throughout the period of renovation. Payments to the contractor can be handled in two phases. The first payment can be made at the start of the project (i.e. 50% down to start the work); and, the second payment can be made at the project’s conclusion.
203k Standard does not have a cap, as long as the repair cost + purchase price is within the county’s FHA lending limits and required a bit more paperwork. Borrowers using the Standard 203k can add up to six months of mortgage payments to their construction loan for the period during which the home is unhabitable. Payments are made differently. There is an assigned “consultant” who monitors construction, making payments as each phase of rehabilitation is completed.
What types of repairs can be included in the 203k program?
The two 203k programs also vary in what type of work can be performed. The FHA program guidelines include a comprehensive list. Shown below are the most common repairs.
Limited 203k Standard 203k
• Repair/replacement of roofs, gutters and downspouts • All items noted under Limited 203k plus:
• Repair/replacement/upgrade of plumbing and electrical systems • Major rehabilitation, such as the relocation of a load-bearing wall
• Repair/replacement of existing flooring or carpet • New construction, including room additions
• Minor remodeling which does not involve structural repairs (kitchen and bathrooms) • Repair of structural damage
• Exterior and interior painting • Repairs requiring detailed drawings or architectural exhibits
• Weatherization of windows and doors, insulation, weather stripping • Landscaping or similar “site amenity” improvement
• Purchase and installation of appliances • Improvements that require a plan reviewer
• Improvements for accessibility for persons with disabilities • Improvements that result in work not starting within 30 days after loan closing; or cause the owner to be
• Lead-based paint stabilization or abatement of lead-based paint hazards displaced from the property for more than 30 days during the time the rehabilitation work is being conducted
• Repair/replacement or the addition of exterior decks, patios, and porches • Connect to public sewer or water
• Basement remodeling which does not involve structural repairs • Convert a one-famiy home into a 2-,3- or 4-unit home, or vice versa
• Basement waterproofing
• Window and door replacement and exterior siding replacement
• Well or septic system repair or replacement
Can I use this loan to refinance my mortgage plus complete renovations, or is this just for a Purchase?
While most people use this loan to buy a home, it can be used to refinance too. As long as you have at least $5000 in improvements to do, you can use this option. Your maximum refinance loan amount is the lowest of these three calculations:
• Your current mortgage(s) on the property plus renovation and certain closing costs;
• The current property value plus renovation costs; or
• 110 percent of the improved value multiplied by FHA's 97.75 percent maximum loan-to-value ratio.
What is the required down payment?
FHA requires just 3.5 percent down payment, based on the purchase price + total project costs. For example: Purchase price $200,000 + Total renovation costs $25,000 = $225,000 x 3.5% = $7,7875 down payment. You can also receive 100 percent of your required down payment via a gift from a family member.
What is the maximum 203k loan amount?
You can borrower up to 110 percent of the property's proposed future value also known as after repaired value which estimates what the home will be worth once all the renovations have been completed, or the home price plus repair costs, whichever is less. But note that your total purchase price plus repair costs must still fall within FHA loan liimits for the area.
Can I use a 203k loan to flip a house?
No. These loans are only available to buyers who plan to live in the home for the foreseeable future. Yes, you are able to sell the home someday, but you can't enter into the transaction knowing you will sell the house as soon as it's fixed up. You must live in the house as your primary residence for 12 months before renting it our or selling.
Can I do the repairs myself with a 203k loan?
Usually, no. You must choose licensed contractors for all work. The only exception is if you are a licensed and a full-time contractor by trade. In these cases, some lenders may approve DIY work.
Am I required to have mortgage insurance with a 203k loan?
All FHA mortgages require then borrower to apy two mortgage insurance preimums:
FHA mortgage insurance premiums cannot be canceled in most instances. The only way to get rid of the premium is to refinance into a non-FHA loan or to sell your home.
What are the traditional steps to acquire a 203k loan?
Here are the steps you’ll complete when buying a fixer-upper with an FHA 203k loan. It’s a little different from a “regular” loan, because you’ll be submitting your list of improvements, and the loan doesn’t completely fund until the improvements are complete.
1. Find a lender approved to do 203k loans, such as RAM Mortgage Partners, LLC.
2. Apply for your home loan and get a pre-approval letter
3. Find a property. Make sure the offer contains language indicating that you need a 203k loan in order to complete the purchase.
4. Find a contractor and obtain bids.
5. Submit everything to the lender, close the loan.
6. Complete the repairs and the lender pays the contractor.
FANNIE MAE HOMESTYLE LOANS:
What is a Fannie Mae HomeStyle loan?
The Fannie Mae HomeStyle loan is a conventional loan that is aimed at making renovations to an existing property easier for buyers. Rather than having to take out one loan to purchase your new home and then another loan to cover the costs of renovations, the HomeStyle allows you to roll both costs into one.
How much in repairs can be financed and when are the funds disbursed?
The maximum loan amount vaires based on a Purchase or a Refinance. On a Purchase, the cost of the renovations must not exceed 75% of the lesser of: the sum of the purchase price plus renovations costs, or the 'as completed' appraised value of the property. On a Refinance, the cost of renovations must not exceed 75% of the 'as completed' appraised value of the property.
After the loan closes, up to 50% of the funds can be released to cover the cost of obtaining materials or paying some upfront costs like designer or architect fees. However, the funds must go directly to the vendors, rather than the homeowner. The remainder of the funds is disbursed to the vendors once the work has been completed and inspected by a qualified professional.
What types of repairs can be included in the HomeStyle loan program?
There are very few restrictions on the types of repairs allowed. All of the repairs noted in the FHA 203k section plus swimming pools, luxury items and more.
Can I use this loan to refinance my mortgage plus complete renovations, or is this just for a Purchase?
Yes. The HomeStyle renovation mortgage loan is originated as a limited cash out refinance transaction.
What is the required down payment?
HomeStyle loan requires 3-5 percent down payment, depending on type of property.
What is the maximum HomeStyle loan amount?
The maximum loan amount vaires based on a Purchase or a Refinance. On a Purchase, the cost of the renovations must not exceed 75% of the lesser of: the sum of the purchase price plus renovations costs, or the 'as completed' appraised value of the property. On a Refinance, the cost of renovations must not exceed 75% of the 'as completed' appraised value of the property.
Can I use a HomeStyle loan to flip a house?
Yes, A HomeStyle Renovation loan is available for property owners interested in rehabbing 1-4 unit principal residences, one-unit second homes, or one-unit investment properties, including unitls in codo's and PUDs.
Can I do the repairs myself with a HomeStyle loan?
This loan does allow for the homeowners to to take on a portion of the work by themselves on a one-unit property. However, it can only account for 10 percent or less of the total project and it must pass inpection once the work is finished.
Am I required to have mortgage insurance with a HomeStyle loan?
This loan does not require an upfront mortgage insurance premium like FHA loans. However, you will have to purchase private mortgage insurance (PMI) if you will have less than 20% equity in the home once renovations are complete.
What are the traditional steps to acquire a HomeStyle loan?
Here are the steps you’ll complete when buying a fixer-upper with a HomeStyle Renovation loan. It’s a little different from a “regular” loan, because you’ll be submitting your list of improvements, and the loan doesn’t completely fund until the improvements are complete.
1. Find a lender approved to do HomeStyle Renovation loans, such as RAM Mortgage Partners, LLC.
2. Apply for your home loan and get a pre-approval letter
3. Find a property. Make sure the offer contains language indicating that you are taking out a HomeStyle Renovation Loan in order to complete the purchase.
4. Find a contractor and obtain bids.
5. Submit everything to the lender, close the loan.
6. Complete the repairs and the lender pays the contractor.