In a market where you may not be able to buy a home that has everything you want or sell your house at top dollar “as is”, home renovation loans have been the key for many buyers and sellers. We’ll compare the three most popular sources for the funds: Cash-Out Refinances, FHA 203k Loans, & Fannie Mae HomeStyle Loans
A Closer Look: Cash-Out Refinance
If you currently own a home with a lot of equity, this may be a good option for you. A cash-out refinance will allow you to pay off your current loan and tap into the equity in your property. You’ll close on your loan and receive the funds within 3 business days. This can be done in under 21 days and often we don’t need an appraisal.
A great option for those who currently pay mortgage insurance, have a higher interest rate, intend to do the work themselves, or want to use the funds for a variety of things.
A Closer Look: FHA 203k
FHA loans, in general, have more relaxed underwriting guidelines for the borrower, allowing for lower FICO scores and higher debt to income ratios. Where it relaxes its guidelines for the borrowers it becomes stricter in it’s property guidelines. Luxury repairs are not allowed and any of the repairs on their safety list MUST be completed. FHA offers a limited version of the 203k which caps the renovation cost to $35,000-, but also has less requirements. One of those requirements is the need for a qualified HUD Consultant.
On a standard FHA 203k, this consultant will verify the contractor bids and oversee the project from planning to completion. Though it isn’t required to hire a consultant on the limited 203k, many people choose to for the security they provide.
Like all FHA loans, there are drawbacks surrounding the mortgage insurance. There is an Up Front Mortgage Insurance Premium (MIP) of 1.75% on almost all FHA loans. While this fee is typically financed, it does increase the overall cost of your loan. Additionally, the mortgage insurance is for the life of the loan. However, interest rates are typically lower with FHA than with Conventional loans.
This is a great option for those who may not qualify for a conventional loan, are looking to perform the work on a multi-family home, or have FICO scores that are below 680.
A Closer Look: Fannie Mae HomeStyle
The HomeStyle loan is a lot like the FHA 203k, but with a few major difference: the allowed repairs, the occupancy-type allowed, and the total costs. The HomeStyle loan allows more flexibility in the type of repairs that can be made. One major bonus is that this loan can be used to install or repair in-ground swimming pools. This program also allows renovation to second homes and investment properties. Also, because Fannie Mae does not have an up front MIP, those who choose this program save by avoiding the 1.75% Up-Front fee.
This is a great option for those with higher FICO scores, or a large down payment, looking to install a pool or other “luxury items”, have lower debt to income, or for those who want to perform the work to a house they aren’t occupying.
Refinance vs Renovation Loan
Unlike a cash-out refinance, both the FHA 203k Loan and the Fannie Mae Home Style loan allow you to borrower based on the “after-improved” value. You can also use these loans to purchase a home and build in renovation costs. This results in a higher allowable loan amount and more funds available for construction. Both programs also have a “one-time-close” allowing you to apply for a single loan, sign one set of documents, and pay closing costs only once.