How Fannie Mae Homestyle & FHA 203K Loans Work for Renovating an Existing Home
You’ve grown to love where you live, but you’ve outgrown your home. You could move, but it may mean choosing between the right home and the right neighborhood. So you’re considering a major renovation project, but don’t really know your financing options. Chances are you’ve heard of Fannie Mae Homestyle or FHA 203K Renovation loans, but aren’t sure how these loans work when renovating an existing home. Here’s what you need to know:
Key Points of Fannie Mae Homestyle & FHA 203K Loans When Renovating
- You Borrow Based on Your ARV - This biggest differentiator of both Homestyle and FHA203K loans versus traditional loans is that they’re based on the ARV, or After-Renovation-Value, of your home; not the home’s current value. This allows homeowners like you to significantly increase how much you can borrow for your renovations in a loan that includes the money you need to cover all renovation costs.
- It Replaces & Pays Off Your Existing Mortgage - You will be required to refinance your existing mortgage with an FHA 203K or Fannie Mae Homestyle loan. And in order to do so, you have to pay it off. Both of these construction loans include the additional funds to cover the balance of your first mortgage, plus the cost to cover the renovations and any closing costs.
- Rates are Typically Higher - The ability to refinance is great if the current rate environment is competitive when your renovations are completed, but if you’ve locked in a nice low rate in the past, you may end up paying more. Keep in mind that both Homestyle and FHA interest rates range from 1% to 1.5% higher than traditional mortgage rates.
How Much Can I Borrow?
For primary residences, Fannie Mae lets you borrow up to 95% of the ARV of the home. So if your home will have an after-renovation value of $500k, you can borrow up to $475k. Whereas if you owed $375k on your first mortgage, you would only be left with $100k to pay for renovations and closing costs. Similarly, a FHA 203K allows you to borrow up to 96.5% of the home’s ARV up to $408,250 versus the alternative with a traditional loan.
Programs for second homes and investment properties also exist with lower Loan-to-Value (LTV) ratios.
How Much Does it Cost?
Pricing will depend on your credit score and your LTV. The lower your LTV (or the less you borrow against the value of your property) and the better your credit, the better your rates will be. But Homestyle loans and FHA 203Ks in general have higher rates than traditional mortgages.
How Does the Process Work?
The process is pretty simple:
- Figure out what renovations you want to do
- Hire a contractor/architect and finalize your renovation plans & budget
- Work with RenoFi to see if either a Homestyle loan or FHA 203K is the best option for your project (hint: there might be better solutions!)
- Choose a lender & apply - the steps are the same as any other mortgage application + submitting your renovation plans for appraisal
What Do I Need to Apply?
Prior to closing, you’ll need to provide:
- Project Estimate - a formalized estimate written by the contractor
- Income & Asset Verifications - bank statements, paystubs, W2s, & tax returns
- Title Insurance & Title Report
- Homeowners Insurance - this may require both builders risk and standard insurance depending on loan amount
Is Fannie Mae Homestyle or FHA 203K Loan Right For Me?
If you’re looking to increase your borrowing power, both Fannie Mae Homestyle and FHA 203K’s ARV financing structure can help you get more money to put toward your renovations. But refinancing your existing mortgage could cost you in a low rate environment. The good news is you have options. To learn about supplementing a standard FHA 203B or a conventional loan with a Renovation Home Equity loan to help lower your insurance and the interest rates dependent on the loan amount, RenoFi is here to help. Contact us to discuss your options.