The FHA 203K and the Fannie Mae HomeStyle Loan are home renovation loans that allow you to borrow money based on the after-renovation value (ARV) of your home.
Unlike a traditional loan, which is based on the current value of your house, these loans are based on the estimated future value of your house after renovations.
This article gives a breakdown of the features of each loan to help you decide if either one is a good fit for your individual situation.
An FHA 203K loan is a government-insured loan that allows borrowers to finance the renovation of a home, and is also known as a construction loan.
This type of loan is ideal for borrowers who have limited funds available for a down payment or those who want to avoid the hassle and expense of private mortgage insurance (PMI).
Low-interest FHA 203K loans also include flexible payback plans and low-interest rates.
Some of the benefits of FHA 203K loans include:
If you are looking to renovate a home, FHA 203K loans offer an attractive and affordable financing option.
FHA 203K loans also have certain disadvantages:
A Fannie Mae HomeStyle loan is a government-sponsored mortgage scheme that enables borrowers to finance both the purchase and remodeling of a house in a single loan.
Like the FHA 203K, this type of financing makes it possible for homeowners to make necessary repairs and upgrades to their homes, all at once, without having to take out multiple loans or lines of credit.
The federal government guarantees the HomeStyle renovation loan, which can be obtained through Fannie Mae-approved lenders.
This guarantee makes it easier for borrowers to get loans because lenders know they'll get paid even if the borrower defaults.
Fannie Mae HomeStyle loans offer the following advantages:
Here are some of the drawbacks to the Homestyle loan:
The FHA 203K loan is meant to let you buy a house and make modifications all at once. That way, borrowers only have to get one loan instead of two.
Likewise, Fannie Mae's HomeStyle loan also allows borrowers to finance both the purchase price and renovations on their new home in one fell swoop.
So if you're buying a house that needs work, this type of financing can be helpful.
There are some major differences, as outlined in the table below:
So, if you're trying to decide between an FHA 203K loan and a HomeStyle loan, it really comes down to your individual needs and circumstances.
If you have a low credit score or very little money saved for a down payment, an FHA 203K loan might be the better option.
But if you're looking to finance a more significant renovation project, a HomeStyle loan might be the better choice.
An FHA 203K loan has the advantage here, with a 3.5% down payment versus Fannie Mae's 5%.
Although this makes it easier to obtain an FHA 203K loan, this does result in costlier mortgage payments.
The bigger down payment of the Fannie Mae HomeStyle Loan means you end up paying interest on a smaller portion of the purchase price. As a result, even if you have to spend more today, you end up saving a lot more money in the long run.
The debt-to-income ratio rises with an FHA 203K loan because of the lower credit requirement.
This can make the FHA 203K loan seem like a better option for those with a lower credit score.
However, given recent research indicating that those who take loans with a high debt-to-income ratio are more likely to go into debt than those who stick to lower debt-to-income ratios.
Fannie Mae comes to the rescue in this situation. As we've discussed before, getting FHA 203K loans is easier, but you're limited to home modifications that the Federal Housing Administration (FHA) considers necessary.
Fannie Mae, on the other hand, does not impose any limitations on what can be remodeled, allowing you to renovate at your leisure.
Fannie Mae is in the lead here. With Fannie Mae, your cap is $548,250, though it may be more depending on your area and location. You can borrow up to $822,375 if your home is in a high-priced location.
The FHA 203K loan, on the other hand, has an annual maximum. A single-family home in 2022, for example, has a borrowing limit of $420,680.
The FHA 203k loan allows you to fund not just the purchase price of a home, but also any necessary repairs or modifications. It's perfect for buying a fixer-upper or for making your own personal touches to a home you're already buying.
The FannieMae HomeStyle loan is very similar, except it can be used on any type of home, even new construction. Both loans are available through most lenders.
With either loan, you'll need to get quotes from licensed contractors for the work you want to be done and include those in your application. The lender will then give you a single loan for the purchase price of the home plus the cost of the renovations.
You'll make one monthly payment, and once the work is completed, the contractor will be paid directly from the loan proceeds.
There are some restrictions on what types of work can be done with each loan, so be sure to talk to your lender about what's allowed before you get too far into the process.
The FHA 203K and the FannieMae HomeStyle loans have some significant differences when it comes to financing a vacation home.
The FHA 203K cannot actually be used for a vacation home (or investment property). The property must be a person's primary residence.
The FannieMae HomeStyle loan is a conventional mortgage loan that can be used for properties that need minor or major repairs or renovations.
This means that it can also be used for a vacation home (or investment property) that needs work in order to be livable. To qualify for this loan, the property must be owned by the borrower, among other requirements.
Both the FHA 203K and the Fannie Mae HomeStyle loan can be used to buy or refinance a house that needs renovations.
If you are purchasing a home, the loan covers the purchase price and the cost of renovations. If you are using the loan for your existing home, it covers the refinancing cost plus the cost of upgrades.
To qualify for the FHA 203K or Fannie Mae HomeStyle loan, you'll need to meet the following criteria:
If you're not sure which one is right for you, speak with a loan officer to learn more about your options.
Are there alternatives to these loans? Clearly, a home equity loan would be a superior choice. But what if you don't own your house and don't have enough equity to qualify for a loan like this?
At Housetable, we have a better option. We mix the advantages of borrowing against the ARV of your home with the advantages of a home equity loan. Here are some of the advantages of Housetable Home Equity Loans:
To learn more about your loan options, contact us today.