Why FHA 203Ks & Homestyle Loans Suck for Purchasing & then Renovating
FHA 203K and Fannie Mae Homestyle loans have traditionally been the only solutions for homebuyers looking to finance both the cost of purchasing AND renovating a new home. But today, that’s no longer the case. Mortgage bankers now often avoid suggesting FHA 203Ks and Homestyle loans to their clients, and realtors are steering both their buyers and sellers away from these options completely. Why? There are four primary reasons that apply to both loans:
1. If You Snooze, You Lose
Imagine this scenario: a home has come up for sale on the perfect street. Yes, the home needs a little (or maybe a lot) of work, but a neighborhood like this in your area is too valuable to pass on. You plan on applying for an FHA 203K or Fannie Mae Homestyle loan so you can borrow enough money for the purchase and renovation. In the meantime, another buyer offers the same price, using traditional financing. Who does the seller and their agent choose? Not you.
So you just lost your dream home. But why? The truth is home buyers using one of these renovation loans are at a huge disadvantage in a competitive market because these loans require extra steps as compared to paying cash or using a traditional mortgage. When you’re up against someone who can move quickly to finalize the deal while you’d drag out the sale bogged down by the FHA 203K or Homestyle process, odds are that seller won’t be choosing you.
So what are some of these extra steps with FHA 203Ks and Fannie Mae Homestyle loans?
- Finalize your renovation plans - Before anything else, you have to finalize what renovations you want completed. While this isn’t a process you typically want to rush, with both FHA 203Ks or Homestyle loans, you need these plans to obtain the financing.
- Hire a contractor - Once you've decided what you want to do, you need to find a qualified contractor for the job. Again, not something you should rush, considering how important it is to find the right one for your project. Certain jobs may also require a licensed architect if you plan on making structural changes.
- Hire a HUD consultant - A FHA 203K loan requires you to hire a HUD consultant for renovations over $35,000, while the same is required for renovations over $50,000 with a Homestyle loan. This can add weeks to the process, especially if that consultant requires any changes to your plans. For example, not all homes are FHA compliant. If your home doesn’t meet the loan’s minimum health and safety standards, you’ll be required to make certain required repairs before you can proceed with your own.
Keep in mind, all these steps have to happen weeks before you even purchase the home, so if those competing buyers are skipping those steps with a traditional mortgage, it’s safe to say you’re already out of the game.
2. Warning: Potential for Even More Delays
On top of all these other hurdles, your FHA or Homestyle lender could also hurt your chances of getting the home you want. Since there isn’t any special training or requirements to originate either a 203K or Homestyle loan, many lenders can do it, but not all are set up to support the product, which can bog down the system. As a result, a lot of lenders are closing these loans in as much as 3-6 months, compared to 45 days like a traditional loan. Or they may just try to point you in a completely different direction than the home you actually want.
3. Big Decisions, Little Time to Think
All additional work aside, no one likes making decisions under the pressure of a ticking clock. When you’re buying in a competitive market, both an FHA 203K and Homestyle loan will force you to rush the process. That means having to squeeze everything from planning all the specific details of your renovation project to shopping for the right contractor into a very tight timeline. This only increases the risk of something going awry.
4. Goodbye Low Interest Rates & Fees
The truth is FHA and Homestyle mortgages have a number of advantages when buying a home. They require a minimal down payment and you can have less-than-perfect credit. But those benefits typically come at the cost of a higher rate and the requirement to pay a monthly mortgage insurance payment in addition to financing, while a FHA 203K loan adds an upfront mortgage insurance premium as well. Because of this higher rate and fees, many homeowners end up refinancing after the renovation meaning they pay closing costs twice. So while you’re getting the financing you need to purchase and renovate the home, you’re likely going to be paying a higher mortgage rate with higher fees in the years that follow.
So What Is The Best Option When Purchasing & Renovating?
If you are purchasing a home that could qualify for financing without the need of a higher rate 203K or Homestyle loan, a smarter strategy might be to purchase the home with the lowest rate mortgage you can find and then use a renovation home equity loan to fund the renovations.
This alternative allows you to purchase your new home and simply add the loan when you’re ready. The entire process can be stressful enough, so breaking it into two steps keeps things at a pace you’re comfortable with. That not only means staying competitive against other buyers to get the home you want, but also making all the big decisions on your own terms. They say timing is everything, after all.
The key takeaway from this blog is you have options. Before jumping into an FHA 203K or Homestyle loan to finance your home purchase and renovation, contact us to discuss our renovation home equity loan and prepare you to get the home you want on your terms.