FHA 203(k) Loans vs. FNMA HomeStyle® Loans – Which is better for you?
A mortgage renovation loan comes in many flavors, and CMG Home Loans offers two: FHA 203(k) and FNMA HomeStyle®. When it’s time to make changes to your home, the loan you choose will be determined by several factors, including the kind of improvements you’ll be making, the overall cost of those improvements, and your budget.
Generally, FHA 203(k) loans work for homebuyers who are making structural repairs such as plumbing or even an upgraded kitchen to improve functionality. HomeStyle® requires a stronger credit score and provides funding power for homeowners to make “luxury” improvements like a new pool or a modernized bathroom. You can completely update your home, including bathrooms or kitchen remodels. You can even add square footage. Just about anything you can think of, you can do.
Let’s take a look at these two loans programs, the differences between them and which you should choose when you’ve decided that your home needs some changes.
What is an FNMA HomeStyle® Mortgage?
The Federal National Mortgage Association (FNMA), commonly called Fannie Mae, offers the HomeStyle® program. Fannie Mae is a government-sponsored enterprise (GSA), so their loans are conventional ones backed by private lenders, not a federal government agency. FNMA HomeStyle® allows borrowers to fund what could be called “luxury” home improvements beyond what many other renovation loans allow. Examples of upgrades you can pay for include:
- Permanent landscaping features
- A remolded bathroom
- Room additions
- A backyard deck
You can use a HomeStyle® loan for almost any type of home, including single-family houses, condos and manufactured homes. If you’re buying a home, you can get a less expensive fixer-upper and use a HomeStyle® loan to pay for repairs.
Click here to read more about Fannie Mae HomeStyle Loans!
What is an FHA 203(k) rehab mortgage loan?
FHA 203(k) loans are part of the larger Federal Housing Administration (FHA) mortgage program. They’re federally backed and designed to help borrowers who would benefit from flexible credit and debt-to-income ratio requirements. There are, however, some requirements you’ll want to consider.
FHA 203(k) loans focus on repairs and structural changes. In addition, they establish an escrow account that holds the money for your renovation contractor.
What are the main differences between FHA 203(k) and FNMA HomeStyle®
Mortgage insurance
Both loans require mortgage insurance, though the terms and flexibility that come with a HomeStyle® loan can be better than those of an FHA 203k loan. With FHA 203k loans, you’ll have to pay a flat percentage for mortgage insurance every month. Your credit score and LTV have no impact on the cost of your mortgage insurance, nor will you be able to cancel it.
With the HomeStyle® loan, you won’t have to pay upfront mortgage insurance. Additionally, the cost of mortgage insurance every month will be based on your credit score and LTV. The lower your LTV and the higher your credit score, the less you’ll have to pay for mortgage insurance. Once your LTV is less than 80 percent of your home’s value, you can request the mortgage insurance be dropped.
Maximum renovation amount
There are two kinds of FHA 203(k) loans: The limited (formerly known as the streamline 203(k) and the standard. As the name may suggest, the 203(k) limited caps its funding at $35,000 and will help fund cosmetic changes. 203(k) standard loans fund major renovations or structural changes that cost at least $5,000.
Your HomeStyle® loan maximum is based on the home’s after-renovation value (ARV). You’ll be able to borrow up to 95% of that amount. If, for example, your home is worth $200,000 but will be worth $300,000 after upgrades, you’ll be able to borrow a max of $285,000 – or 95%.
Difference of Down Payment Needed
You can save costs if you purchase a home with a combined purchase and renovation loan. That’s because you can go after low-cost homes in need of a little TLC. In addition, you only pay one set of closing costs for both loans.
An FHA 203(k) loan is federally backed, while HomeStyle® is a conventional loan. This means that the down payment requirements will be less for the FHA 203(k) loan, and they reach only 3.5% of the total cost.
For HomeStyle® loans, the down payment requirements vary a little based on certain factors. The minimum down payment is 3% for most primary homes. However, lenders vary in what they require for a down payment. For investment properties, the minimum down payment is 20%.
Investment properties vs. primary residence
You can fund almost any renovation project with a HomeStyle® loan. They can be used for single-family homes, multi-unit, condos and manufactured homes. You can also use a HomeStyle® loan to renovate an investment property as well as your primary residence.
FHA 203(k) loans can be used to upgrade all the same types of properties as a HomeStyle® loan, except for an investment property or second home. One thing that is possible is to buy a multi-unit and live in one of the units, and then it is considered a primary residence.
Choosing the right renovation loan
The right renovation 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.
As a top-rated mortgage professional*, I understand how to deliver service with the personal touch that your unique goals require. My mission is to provide a simple, easy, and affordable renovation loan process.
To learn more about our 203K renovation loan visit Home Renovation Loans (FHA 203k | Fannie Mae HomeStyle). Contact me today to reach your homeowner goals!
HomeStyle® is a registered trademark of Fannie Mae.
*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).