As a first-time homebuyer, you might have limited funds to purchase a home. Oftentimes, this means that you are left with the less than desirable homes to choose from. You might find a home that you love the layout of, but it needs repairs or you might find a home in a rural area that sat vacant for a while and needs some TLC to get it back into proper living conditions. Whatever the case may be, there are plenty of rehab loans out there to help you make your home ownership dream a reality.
HomeStyle Conventional Loan
Contrary to popular belief, not all rehab loans are government loans. The HomeStyle loan program is a Fannie Mae program and it offers money for you to fix up a home with appraiser required repairs or cosmetic changes that you desire. The only caveat to the loan is that any changes you make must increase the value of the property.
Property and LTV Guidelines for the HomeStyle Loan
You can use the HomeStyle loan on your principal residence that is a single family home, condo, townhome, or 1-4 multi-unit property. No matter what type of property you purchase, the maximum LTV allowed is 95% of the value after the repairs. This means the appraiser figures the as-is value now plus the value of any repairs you plan to make. If you worked out a deal to purchase the home for less than the current value, however, the lender must use the purchase price plus any changes in value for the repairs you intend to make for the value of the home.
Terms for the HomeStyle Loan
You can choose from a variety of different terms for the loan program including fixed rate for 15 or 30-year terms as well as adjustable rate mortgages. The contractors must complete the renovations within 12 months of the closing date and the funds from the loan can pay for almost any type of renovation as long as it is a renovation that remains permanently affixed to the property and increases the value of the property.
Choosing the Contractor for the HomeStyle Loan
In order to choose the contractor for the HomeStyle Conventional Loan, the following guidelines must be met:
- Lender must approve the contractor that you choose based on his experience and qualifications including proper insurance and licensing
- You must have an executed construction contract for the work the contractor will complete
- A professional contractor or architect must draw up the plans for the intended repair/changes
Do-it-Yourself Projects with the HomeStyle Loan
In some cases, a lender may allow you to perform your own repairs with the funds from the HomeStyle loan, but you must meet certain requirements. First and foremost, the repairs you complete cannot exceed 10% of the future value of the home after the repairs. You must also own the home as owner-occupied and it must only be one unit. Last, but not least, the money from the loan may only cover the necessary materials and labor for the work you complete.
Allowed Renovation Costs
The total allowed amount for the renovation costs cannot exceed 50% off the projected future value of the home. This includes costs for labor, materials, permits, architectural plans and any contingency reserve. Technically, Fannie Mae does not require a contingency reserve unless you purchase a multiple until property, but a 10% reserve is often suggested in the event that something comes up down the road. In addition to the renovation costs, you may include up to six months’ worth of principal, interest, taxes and insurance if you are unable to live in the property while the contractor completes the work.
FHA 203K Rehab Loans
The FHA also offers rehab loans for first-time homebuyers. They offer two different programs: the full FHA 203K and the Streamline FHA 203K. Both loans offer funds to help you fix up a home you purchase; they just differ in the amount you can change. Because this is an FHA program, it is the desired program for borrowers that have less than perfect credit or a higher than average debt ratio.
Property and LTV Guidelines for the FHA 203K Loan
The FHA 203K loan is eligible on a single family home, condo, townhome, or up to a 4-unit multiple unit property as long as you occupy one of the units as your own. You must put down at least 3.5% of the purchase price of the home as your down payment. The total LTV for the loan, however, can be as much as 110% of the future value after the contractor completes the repairs or changes.
Terms for the FHA 203K Loan
Just like the Fannie Mae home rehab loan, the FHA home rehab loans allow for a variety of terms including fixed rate and adjustable rate terms. You can opt for 30-year terms or less, if you qualify based on your income and debt ratio. The contractors must complete the work within 6 months of the closing date.
The Types of FHA 203K Loans
There are two different types of FHA 203K loans: full 203K and streamline 203K. The full 203K loan does not have a maximum dollar amount that your repairs can reach as long as you are within the FHA loan limits and within 110% of the projected value of your home. The Streamline 203K loan, however, can only cover repairs up to $35,000 and they cannot be structural or considered “major” repairs. For example, Streamline 203K loans cannot cover any changes that affect a load bearing wall, are additions on the home, or that will displace you from the home for more than 30 days. Examples of acceptable Streamline 203K repairs include:
- Repairing or replacing faulty roofing, flooring, HVAC, plumbing or electrical
- Purchasing and replacing appliances
- Changing the interior or exterior paint color
- Repairing, replacing or adding a porch, patio or deck
- Making accessibility changes
Examples of full 203K repairs include:
- Room additions
- Major kitchen remodeling
- Landscaping addition or renovations
- Fixing structural damage on a house
- Making major accessibility renovations
Choosing the Contractor for the FHA 203K Loans
Whether you choose the full FHA 203K loan or the Streamline 203K, you need to secure the services of a licensed and insurance contractor. Your lender has the final say in which contractor can perform the work on your home. You need to find professionals that have the experience, proper licensing and insurance and appropriate prices for the work you need to be done. The contractors will submit a bid that includes all of the details that the work involves so that the lender can determine the right contractor for the job. If you use a full 203K loan, you will also need to use a loan consultant to help you through the loan process. This professional can also help you choose the right contractor, taking some of the stress off of you.
Do-it-Yourself Projects with FHA 203K Rehab Loans
Most lenders do not allow you to do your own repairs or renovations with the 203K loan. There might be minor exceptions if you have proof of adequate experience and you have the time. Because the loan is so time sensitive, though, requiring completion of the work within 6 months, most lenders prefer a professional contractor to do the work.
Allowed Renovation Costs
The allowed renovation costs on the FHA 203K loans are the same whether you use the full or streamline 203K loan. The maximum LTV on either loan is 110% of the future value of the home after the repairs. This amount may include the cost of the materials, labor, consultant fees (unless the lender requires it paid up front) and any architectural fees. If you take out a full 203K loan, you will also need to include a 10% contingency reserve in the event that anything came up while the contractor completed the work.
USDA Rural Housing Renovation Loan
Another great product for first-time homebuyers is the USDA Rural Housing Renovation Loan. Only people that wish to purchase a home in a rural area will qualify for this program, but it provides you with the funds to purchase a home as well as make repairs to the home after the closing.
Property and LTV Guidelines for the USDA Rural Housing Renovation Loan
The USDA Rural Housing Renovation Loan works a little differently than the other rehab loans. The home that you purchase cannot exceed 1,800 square feet and must not be worth more than the loan limit for the area, based on the USDA guidelines. The good news is that the USDA does not require a down payment – you can secure 100% financing for your renovation loan.
Terms for the USDA Renovation Loan
In order to take out a USDA Renovation loan, you must be willing to have a fixed rate mortgage, which is yet another difference with this loan. The USDA does not allow adjustable rate mortgages and a majority of the terms are 30-year terms.
Choosing the Contractor for the USDA Loan
Just as is the case with the above rehab loans, you must use a contractor to perform the work on the home. Choosing the contractor requires that you secure bids from several contractors and ensure that they are appropriate for the job. Because the USDA guarantees the loan, they want you to use contractors that are properly licensed and insured to avoid any financial issues while they complete the work. If you used a contractor that was not properly insured, they could come after you for any injuries or mishaps that occur during the work, which could put your mortgage at risk for default.
Do-it-Yourself Projects with the USDA Loan
Just like the FHA backed rehab loan program, the USDA does not allow do-it-yourself projects for their renovation loan. Instead, they require you to secure the services of the appropriate contractor to ensure that the job is done right and on time.
Allowed Renovation Costs
Because the funds to complete your renovations are a part of your loan and the lender oversees the funds, the renovations need to be done as soon as possible. However, there are no exclusions regarding what can and cannot be done in terms of work on the home. What the USDA and the lender care about is that the total amount of the work does not exceed 10% of the value of the home. Typically, people use this renovation loan to help them bring their home up to USDA code when the appraisal does not pass the USDA guidelines and the seller is not willing to make the changes prior to the loan closing.
As you can see, as a first-time homebuyer you have many rehab loans available to you. If you have great credit and the appropriate down payment, the Fannie Mae program is the most affordable program for most buyers. However, the FHA and USDA programs offer terms that are more flexible and qualification guidelines, making it easier to make your home purchase a reality.