With the supply of turnkey real estate tightening across the housing market, in the wake of increasing property values coupled by low mortgage rates, the environment has never been better for real estate investors looking to flip homes.
But one of the biggest problems with rehabbing properties has always been centered around financings. You either need a hefty amount of liquid cash to pay for renovation costs upfront or you need a short-term financing solution.
Even if you are not in the flipping business but rather want to find that forever home you can grow old in that has a solid foundation but needs a major face-lift, financing extensive renovations poses a big hurdle.
Traditional lenders including banks and credit unions often require formal construction loans for extensive rehab projects, charge multiple fees, and can be quite involved and constraining in the process. If you don’t hit specific benchmarks, then your project could stall out and exceed your anticipated completion date.
Similarly, going with a hard money lender could be just as expensive as they often require lower loan-to-value ratios and charge higher interest rates.
The good news is that there are great financing options available to borrowers looking to complete extensive renovation projects without the need for a separate home equity loan or the use of hard money.
The FHA 203(k) loan program as well as Fannie Mae’s HomeStyle Renovation mortgage offering both provide flexible and affordable financing if you are looking to undertake an extensive rehab.
But before you commit to any particular program, there are some specific differences between the two that you will want to be aware of.
Here are some of the advantages and disadvantages of each program so that you can decide for yourself which solution is best for your project.
FHA 203(k) Mortgage Programs
Most borrowers overlook government agencies like the FHA when it comes to new construction or renovation projects. But the truth is that the FHA’s 203(k) mortgage program is one of the best financing tools available to qualified borrowers.
For starters, the program allows you to both purchase a new qualified property and combine the cost to rehab it all into one loan. This helps reduce the need for multiple applications, closings, and modifications saving both you (and your lender) time and money.
Furthermore, depending on the extent and cost of your project, you have some flexibility as to which program you want to go with. FHA offers both a standard and limited 203(k) program which has some slight variations.
The limited program caps renovation costs at $35,000 and cannot include remediation of any major foundation or structural repairs. This contrasts to the standard program which does not have a set ceiling in terms of cost (other than the FHA area loan limit) but does require costs to meet a minimum of $5,000.
An additional competitive feature is that borrowers can meet FHA’s more liberal credit eligibility criteria compared to that of conventional financing. Similarly, some borrowers who meet certain credit requirements may be eligible to put down as little as 3.5%.
However, the FHA 203(k) program is not without its disadvantages.
To begin with, the FHA does have strict requirements that the work being completed be done by an approved and licensed contractor. Other third-party providers such as the appraiser or HUD consultant (which may be required in some cases) must also be approved providers as well.
Lastly, any FHA mortgage will come with an upfront MIP (mortgage insurance premium) which is usually 1.75% of the amount you are borrowing, as well as an ongoing, non-cancellable monthly premium added to your mortgage payment.
Less Stringent Credit Eligibility Requirements
Lower Down Payment Requirements
Extensive List of Eligible Uses
Restrictions on Third-Party Providers
Mortgage Insurance Premiums
Minimum Rehab Costs
Fannie Mae HomeStyle Renovation Mortgage Programs
Much Like FHA’s 203(k) mortgage program, Fannie Mae offers it's HomeStyle Renovation mortgage program for borrowers looking to make home repairs rolled into their first mortgage rather than take out additional mortgages.
One of the driving factors behind the HomeStyle program is that it's conventional financing, meaning even if you end up stuck needing private mortgage insurance, as your equity position changes you will have the opportunity to cancel it one you meet certain threshold requirements.
In terms of how the product is structured, this offering competes with FHA’s program by providing financing up to 97% of the value of 1-unit primary dwellings for both purchases and limited cash-out refinances.
Keep in mind that homeowners with LTV ratios exceeding 95% may need to complete an approved homebuyer’s education course and counseling. Income and area restrictions may also apply.
HomeStyle is distinctly different from other financing solutions in that the limit on eligible renovation costs cannot exceed 75% of the lesser of the purchase price plus renovation costs or the ‘completed’ value of the property.
The property does not require that the home be habitable at the time of closing either. In fact, Fannie Mae provides the flexibility to allow a borrower to finance up to six months of PITIA payments to cover these costs while the home is uninhabitable.
Unlike FHA’s 203(k) program, complete tear downs are not permissible through HomeStyle, although major renovations including putting in a new addition would be allowed, provided they are within the applicable guidelines.
Lastly, HomeStyle has recently been expanded to allow manufactured housing. There are some restrictions such as that the financing cannot exceed the lesser of $50,000 or 50% of the completed value of the dwelling.
Low Down Payment Requirements
Cancellable Private Mortgage Insurance
Manufactured Housing is Permissible
Doesn’t Have to Be Habitable at Closing
Higher Credit Eligibility Requirements
75% LTV Cap on Renovation Funds
Tear Downs Not Allowed
The housing market has been on fire since the beginning of 2020 with no signs of slowing down anytime soon. As inventory remains low, it may be advantageous to consider an all-in-one mortgage financing option for your next real estate investment or home purchase.
Both the FHA 203(k) as well as Fannie Mae’s HomeStyle Renovation mortgage program offer a simple and flexible option if you are looking to combine a purchase or refinance with a renovation project.
Borrowers with lower credit scores and less cash on hand may find the FHA 203(k) program mortgage advantageous and less restrictive compared to other available programs.
However, Fannie Mae’s HomeStyle Renovation program certainly has the edge when it comes to first-time home buyers by providing higher LTV ratios and cancellable mortgage insurance. Those in more rural markets may find the manufactured home flexibilities equally appealing.
Whether you choose the FHA 203(k) or HomeStyle Renovation mortgage program, it is still important to consider all your options before committing to any particular financing tool.
For example, qualified military service members or spouses may want to explore VA-insured programs that may be available including supplemental loans that (while seemingly less efficient) may provide other benefits that the FHA 203(k) or HomeStyle Renovations programs do not offer.
 U.S. Department of Housing and Urban Development. (n.d.). 203(k) Rehab Mortgage Insurance: HUD.gov / U.S. Department of Housing and Urban Development (HUD). Retrieved December 21, 2020, from https://www.hud.gov/program_offices/housing/sfh/203k/203k--df
 Buczynski, B. (2020, December 07). FHA 203(k) Loan: Renovation Mortgage Guidelines. Retrieved December 21, 2020, from https://www.nerdwallet.com/article/mortgages/fha-203k-renovation-loan
 Fannie Mae. (n.d.). HomeStyle Renovation. Retrieved December 21, 2020, from https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homestyle-renovation