Like grades, there are homes that need improvement. There are actually loans that allow you to purchase the home and pay for its repairs as well, at the same time. Presenting home rehab loans, home renovation loans or home improvement loans, they are single-closing loans for the acquisition and rehabilitation of discounted properties on the market.
There are currently two major home construction loan programs available today:
- FHA’s 203(k) loans
- Fannie Mae’s HomeStyle® loans
How each program works
FHA 203(k) Loans
Through its Section 203(k) loan program, the Federal Housing Administration permits borrowers to finance the purchase of a house, or refinance an existing mortgage, and include in that single loan the costs of improvements.
How much you can borrow under the FHA 203(k) program depends on the projected value of your home (purchase price + the cost of renovation), as appraised. The minimum costs of repairs under a 203(k) loan must be $5,000.
If you only need to borrow $35,000 or less, you can take out a streamline 203(k) as opposed to a standard 203(k) loan that finances major rehabilitation work. The standard 203(k) loan can also finance up to six months of mortgage payments during the construction period.
Anyway, the first $5,000 of your loan shall be used to correct or address building code violations, make health and safety upgrades, etc. After doing this, you can proceed to other eligible home improvement projects, which exclude luxury items and those intended for commercial use.
You must a hire a consultant to review the renovation plan. He/she will also perform an appraisal before any disbursement of renovation funds to contractors actually happens (or draw). You are given six months to complete the renovation project and are allowed to make five draws under your loan.
Fannie Mae offers its HomeStyle® loan program for borrowers who want to make moderate home improvements through a single mortgage, which is available for purchase and refinance (limited cash-out refinance) transactions.
Like FHA’s 203k loans, HomeStyle® takes into account the “as-completed” value of the home when determining the mortgage amount. The lenders, at their discretion, can allow borrowers to make the repairs themselves or hire contractors. The loan only requires initial and final inspections.
The HomeStyle® loan program approves of any type of repair or renovation for as long as (i) it is permanently added to the property, and (ii) it adds value to the home. These projects must be completed within a year after the mortgage has been delivered.
How each program differs
Each of the above home improvement loans has varying takes on common mortgage aspects. Take a look at the following criteria that can help you decide which program fits you perfectly.
Credit: FHA loans are known for catering to borrowers with not-so-great credit. While there is no minimum score requirement for 203(k) loans, FHA-approved lenders may require a credit score of 640 or above or scores as low as 600.
Meanwhile, a credit score of 660 is a typical base score among HomeStyle® loan lenders. A credit score of at least 740 may be required in order to get the best HomeStyle® rates.
Down Payment: Under FHA 203(k) loans, borrowers can put down payments as low as 3.5% while HomeStyle® loans require a minimum down payment of 5%.
Loan Limit and LTV: FHA 203(k) loan limits are county-based, with basic mortgage limits of $271,050 and $625,500 for high-cost areas. Using an FHA 203(k) loan, you can borrow up to 110% of your home’s after-improvement value.
HomeStyle® offers up to 95% of the home’s as-completed value. Basically, the LTV should be whichever is less between the purchase price plus the renovation cost, and the as-completed value.
Eligible property: FHA 203(k) loans are applicable to residential properties that must be owner-occupied.
HomeStyle® loans can be taken out for principal residences, second homes, and investment properties.