Why are Fannie Mae Homestyle loans better than FHA 203Ks when renovating?
Discover the differences between these two construction loans, and how they both work for renovating
Before RenoFi came along, the two most common options for buyers looking to buy and renovate a home all in one loan were Fannie Mae Homestyle Renovation and FHA 203K loans. And while they both allow you to borrow money for both the purchase and rehab of a home, there are a few notable differences that make Fannie Mae Homestyle Renovation loans the better choice over an FHA 203K for many homeowners.
Before you decide which is right for you, here’s what Fannie Mae Homestyle loans have to offer versus 203Ks:
- No Upfront Mortgage Premium - Unlike an FHA 203k, Fannie Mae Homestyle loans don’t require an upfront Mortgage Insurance Premium, or MIP. And at 1.75% of the loan amount, the more money you need to borrow, the more this will cost you. For example, let’s say you have a loan for $400K. That’s $7,000 you’ll save with Fannie Mae Homestyle.
- Lower Monthly Mortgage Insurance - These premiums are half of most loan alternatives, including FHA (.40% vs .80%). So again, with that loan of $400K, you’ll save yourself $1,600 each month with Fannie Mae.
- Mortgage Insurance Costs Will Go Away - This .04% MIP is automatically removed after 12 years, or even sooner with proof of 20% equity in the product. Unlike 203K, which has a Lifetime Mortgage Insurance requirement, so you’re stuck paying these rates no matter what the status of your equity may be.
- Lower Interest Rates - In most cases, Fannie Mae offers lower interest rates compared to FHA 203Ks.
- Greater Flexibility - Fannie Mae has less stringent appraisal conditions, so there are less hurdles to jump with minor safety issues. Not to mention, you can’t use a 203K for improvements that FHA considers “luxuries.” Fannie Mae simply requires the improvements be “permanently fixed to the real property,” meaning it may cover that new swimming pool or landscape addition, unlike a 203K.
- Second Homes Qualify - When purchasing or renovating a second home or investment property, FHA isn’t even an option.
- Higher Loan Amounts - If you need to borrow more money, Fannie Mae Homestyle can get you up to $484,350 for your renovation versus 402,500 with an FHA.
How Exactly Do Both Fannie Mae Homestyle & 203K Loans Work When Renovating?
If you’re looking to increase your borrowing power, both Fannie Mae Homestyle and FHA 203K’s after-renovation-value (ARV) financing structure can help you get a lot more money to put toward your renovations with the ability to borrow up to 95% and 96.5% respectively of your home’s post-reno value.
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 really the best option for your project.
- Choose a lender & apply (the steps are the same as any other mortgage application + submitting your renovation plans for appraisal)
One note: Both FHA 203K or Fannie Mae Homestyle loans will require you to refinance your existing mortgage. 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.
Alternatives to these Construction Loans
There are also some negatives to Fannie Mae Homestyle (and FHA 203K) loans when you’re planning to renovate a home you haven’t purchased yet. Here’s what we mean:
- In a competitive market, homeowners paying cash or using a traditional mortgage are always at an advantage because of the extra steps Homestyle loans require. Before you can even apply, you have to finalize your renovation plans and hire both a qualified contractor, as well as a HUD consultant for renovations $35,000+! Pressure’s on. All of this adds weeks to the process, which is time you just don’t have when bidding on a home you love!
- No one likes having to make BIG decisions under the stress of a ticking clock. With Fannie Mae and other construction loans, that’s exactly what you have to do — for all the reasons we mentioned above. From finalizing every little detail of your project to finding just the right contractor, the quicker these things happen, the higher risk for mistakes.
- While a minimal down payment and less-than-perfect credit requirement are great, these benefits typically come at the cost of a higher rate and a monthly mortgage insurance payment in addition to financing (plus FHA 203K loan adds an upfront mortgage insurance premium too). Because of the higher rate and fees, many homeowners end up refinancing after the renovation meaning they pay closing costs twice!
A smarter strategy to get the borrowing boost of these renovation loans without the higher rates might be to simply purchase the home with the lowest rate mortgage you can find and then use a renovation home equity loan to fund the renovations when you’re ready! This allows you to break the process into steps so you can move at a pace that’s right for you.
If you can qualify for a Fannie Mae Homestyle Renovation loan, it’s always the better pick than a FHA 203K, but it’s nice to know you have even more options. RenoFi’s Renovation Home Equity loan can offer the same benefits of Fannie Mae without the need to refinance, plus even lower insurance and interest rates. So to learn about supplementing a Fannie Mae Homestyle or FHA 203K loan with a Renovation Home Equity loan, RenoFi can help. Contact us to discuss all of your options!