A renovation mortgage loan is an excellent option for homeowners who want to change their living space with a few big or small improvements.
They provide low-interest funding when contrasted with credit cards, which have an average of around 17% interest. The same can be said when compared to personal loans. They also have an advantage over cash because home renovation loans let you make changes you want when you want them instead of waiting for your savings to catch up to your goals.
The benefits of many renovation mortgage loans also apply to homebuyers who want to purchase a home in need of repair. In either case, you have several loan options available. They include an FHA 203(k) standard, FHA 203(k) limited, FNMA HomeStyle®, HELOC1 or a home equity loan. As far as what can be renovated, it depends on your budget, property and imagination!
Streamline 203k
For both homeowners and homebuyers, an FHA 203(k) loan is a great way to fund repairs that will make their home one they'll love. But how do you start the FHA 203(k) loan process, what exactly can you repair and how much can you expect in funding? When considering this loan solution, keep in mind that it:
- Is only applicable to primary residences
- Focuses on repairs and fixes as opposed to “luxury” improvements
- Establishes an escrow account that holds the money for your contractor
Although your specific financial position will dictate your loan choices, there is a lot that we can learn in an overview of FHA 203(k) loans. There are two types of FHA 203(k) loans. The limited (formerly known as the streamline 203(k)) and the standard.
As the name suggests, the FHA 203(k) limited caps its funding at $35,000 and will help fund cosmetic changes. This can mean, for example, new carpeting, a fresh coat of paint or the purchase and installation of appliances. Think of these as repairs that can be done while the house is still habitable.
You’ll work with contractors and receive bids for the necessary work. You’re allowed up to two draws per contractor, although some lenders disburse 50% of labor and material costs at closing.
Certain repairs are ineligible with an FHA 203(k) limited. They include:
- Major rehabilitation
- Relocation of a load-bearing wall
- Room additions
- New construction
- Repairs requiring detailed drawings or architectural exhibits
- Repair of structural damage
Full 203k
An FHA 203(k) standard loan funds major renovations or structural changes that cost at least $5,000. The maximum loan varies depending on where your home is. With this loan option, you can replace, construct or demolish different parts of your home.
It involves additional paperwork and working with a HUD “consultant” to oversee the renovation. This may actually speed up the process as a consultant can handle renovation issues that add extra time to construction. Your Mortgage Loan Originator should be able to handle both the additional paperwork and work with the consultant.
For homebuyers, this program provides the added benefit of combining with a purchase loan, allowing you to save on closing costs. It also means you close the loan before your contractor begins their work. This is important because many sellers won’t allow construction to be done on a home before the sale closing – and you wouldn’t want to pay for construction on a home you don’t own yet!
Features of both FHA 203(k) limited and standard include:
- Primary residence only
- Low down payment options
- Standard FHA credit underwriting
- Contractors must be licensed and insured as required by state regulations
- Contractors must submit itemized bids specific to the desired improvements
Fannie Mae HomeStyle
FNMA HomeStyle® is a versatile renovation mortgage loan program that homeowners and buyers across the country use to fund upgrades that range from kitchen modernization to inground pool installation. But how do you use it, and who is eligible to apply?
The Federal National Mortgage Association (FNMA), commonly called Fannie Mae, offers the HomeStyle® program. They are a government-sponsored enterprise (GSA), so their loans are conventional ones backed by private lenders, not a federal government agency. In comparison to FHA 203(k) loans, FNMA HomeStyle® allows borrowers to fund what could be called "luxury" home improvements beyond what many other renovation mortgage loans allow. Examples of upgrades you can pay for include:
- An inground pool
- A remolded bathroom
- Room additions
- A backyard deck
For homeowners, funding renovation projects with a HomeStyle® loan provides much better interest rates than what you'd get using a credit card or a personal loan, providing affordability in the long run.
Secondly, you can apply for a HomeStyle® loan for almost any type of home. That means single-family houses, four-unit houses, condos and manufactured homes. You can even use a HomeStyle® loan to renovate an investment property as well as your primary residence.
For homebuyers, a HomeStyle® loan allows you to add to the list of homes you can purchase. That's because you can now look at less expensive homes that need work. You can combine your purchase loan with a HomeStyle® loan for a single, low-cost loan with one set of closing costs.
You can even begin repairs before you move in – transforming an overlooked fixer-upper into your dream home.
As with any loan, you must meet requirements to access FNMA renovation funding. As of this writing, you'll need a credit score of at least 620. In addition, the maximum debt-to-income (DTI) ratio for eligibility is 45%. DTI is the percentage of your monthly gross income that goes toward paying debts. A high DTI tells Fannie Mae that you may be unable to take on more debt.
If you meet the program requirements, your specific renovation projects must be approved by your lender. You'll need to provide documents that may include:
- A copy of the contractor's license
- Signed work contract with the renovation company
- Outline of project scope, completion date and costs for each phase
Your Mortgage Loan Originator should be able to work with you on getting these documents together.
Once approved for an FNMA HomeStyle® loan, funding is technically capped at 75% of your finished home's "as-completed" appraised value – not the home's current value. This means that if your home is worth $250,000 now, but improvement will bump it up to $300,000, you can borrow up to $225,000 (75% of $300,000).
Home Equity Line
If you’re a homeowner who’s unsure about the options above, a Home Equity Line of Credit (HELOC) loan may be the solution to your renovation goals. A HELOC allows you to access your home’s equity as a line of credit that you can pull from to pay for home improvements or just about any other project and personal goal.
First, what is equity? Equity is the difference between the value of your home and how much you still owe on your mortgage. For example, if you have 60% equity on a home that’s valued at $300,000, your remaining mortgage balance is $130,000, and you have $180,000 in equity.
A HELOC works similarly to a credit card in that you can draw cash against that equity a line of credit. Here are a few features of HELOC loans to keep in mind:
- Acts as a line of credit, in addition to your current mortgage, which you borrow against
- It may have little to no closing costs
- Often have minimum draws for how much you can take at a time
- Interest rates are adjustable
- Home value needs to be at least 15% more than you owe (ex. owing $100,000 on a $300,000 home means you could get $155,000)
- The interest payments may be tax-deductible if funds are used to buy or improve a property2
A great benefit of HELOC loans is that you can access the funds as needed, and untapped cash does not incur interest. This is particularly great for renovating as you may find that a particular aspect of the construction process costs more than you first thought. In that case, you’d pull what you need, and no more.
Homebridge HELOCs offer a set of unique benefits that you should keep in mind when considering this product.
Depending on the home's value, we offer a $400,000 maximum draw.
Our online application process was made for speed and connects to your online accounts to pull the records needed to process your request. The process as a whole may only take five minutes.
You get your funds when you need them, with many customers getting them in as little as five days!3
Home Equity Loan
A home equity loan is similar to a HELOC. However, there are several key differences.
Like a HELOC, a home equity loan uses your home’s equity as collateral for a loan. They also generally offer far lower interest rates than credit cards and other personal loans that many use to pay for home renovations. That means less cost in the long run for you as a homeowner.
However, their similarities end there. A home equity loan doesn’t allow you to take out money as you need. Instead, borrowers are required to take out a lump sum. That lump sum minimum depends on the lending institution, with some going as low as $10,000 and others requiring you to take out $35,000.
The number can change based on the lender and your financial position. Factors like credit score and DTI come into play, so your best bet to learn how much you can withdraw is to contact a Mortgage Loan Originator.
In addition, home equity loans work as a second mortgage and come with interest rates that will likely be a bit higher than your first mortgage.
This product has definite benefits for homeowners who need cash for significant home improvement projects. Still, you should also be aware of the drawback and discuss things with a professional before making your move.
Summary
The right renovation mortgage loan option is the one that fits your renovation goals. In general, a Fannie Mae HomeStyle® loan offers great renovation options and highly competitive rates. However, your financial position may make an FHA 203(k) loan ideal. If you’re a homeowner and want to make changes as you go, then a flexible HELOC loan may be a good idea. For huge projects for those with a large amount of equity, maybe a home equity loan is the solution.
As a top-rated mortgage professional,4 Leesa Sandoval understands how to deliver service with the personal touch that your unique goals require. Her mission is to provide a simple, easy and enjoyable renovation loan process that delivers the home you’ve always wanted.
To learn more, or to apply for the right loan for you, contact Leesa today!
1 For this loan program we are a Mortgage Broker only, not a mortgage lender or mortgage correspondent lender. We will arrange loans with third-party providers but do not make loans for this program. We will not make mortgage loan commitments or fund mortgage loans under this program. Product currently only available in these states: AZ, CA, CO, FL, ID, IN, MN, MT, NV, OR, WA.
2 Please consult a tax advisor for further information regarding the deductibility of interest and charges.
3 Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may take longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and need to order a desktop appraisal to confirm the value of your property.
4 Leesa Sandoval has been listed as a Top 200 Mortgage Originator by Mortgage Executive Magazine, named one of D Magazine's Best Mortgage Professionals and Top 100 Mortgage Loan Originator in Units by the National Association of Minority Mortgage Bankers of America (NAMMBA).