Why You Shouldn’t Rely On FHA 203k, Fannie Mae HomeStyle or Construction Loans for Buying & Renovating A Fixer Upper
FHA 203k and Fannie Mae Homestyle loans have traditionally been the only solutions for a home buyer looking to finance both the cost of purchasing AND renovating a fixer upper. But today, that’s no longer the case and mortgage bankers will often avoid suggesting FHA 203Ks and Homestyle loans to their clients, and realtors are frequently steering both their buyers and sellers away from these types of loan completely. And while most of the time they’re used for building a home from the ground-up, the same applies to construction loans, given that they can also be used for renovating a property.
Photo Credit: Tilly Design Whether you’re in sunny, coastal California, or in the chilly Midwest, you’ve probably been spending a lot of time outdoors due to the COVID-19 pandemic. And the more time you’re spending outdoors with family and friends, the more it makes sense to use your outdoor space to its fullest potential. Maybe that means finally installing that patio area. Or maybe it’s fixing your walkway, adding some greenery, or looking into an in-ground pool that the kids have been begging for.
4 Reasons Why You Shouldn’t Use An Unsecured Home Improvement Loan To Finance Your Renovation Project
When it comes to financing a home remodel, it’s perhaps no surprise that many homeowners find themselves confused as to what their best option is. After all, while a home equity loan or a cash-out refinance has traditionally been used as a way to pay for home improvements, the reality is that these aren’t the only available options, and making the wrong choice can mean expensive monthly payments, reduced borrowing power, or both.
Whether you’ve fallen in love with a fixer-upper or have a list of renovations that you want to do to turn your current home into your forever home, there’s a good chance you’re going to need to borrow money to make this a reality. And one option that you might be considering is a Fannie Mae HomeStyle loan. Similar to FHA 203k loans, these let you combine the cost of purchasing (or refinancing) a property and the renovation costs into a single loan and let you borrow based upon the home’s future value, significantly increasing your borrowing power as a result.
Before RenoFi Loans came along, the two most common options for buyers looking to refinance (or purchase) and renovate a home all in one loan were Fannie Mae Homestyle and FHA 203k loans. RenoFi Loans are awesome, and in many cases they are the best choice to finance home renovations, but they aren’t right for everyone. Often when this is the case, homeowners look to either HomeStyle loans or FHA 203ks, but don’t know how to choose between these.
An FHA 203k loan lets you buy or refinance a property that’s in need of repairs and combine the funding that’s needed to purchase (or refinance) the home and pay for renovations into one loan. Often, these loans are considered by homebuyers who are looking to purchase a fixer-upper, but they can also be used by existing homeowners to refinance and pay for a remodel. But they’re not without their complexities, and the reality is that for many homeowners better alternatives are available.
If you’ve built up equity in your home (that’s the difference between what it’s currently worth and the amount you owe on your mortgage), then tapping into this can be a great way to pay for a renovation. But renovating is expensive. In fact, it’s not uncommon for an entire renovation wishlist to cost $100k or more, and this means that the most common methods of financing (a home equity loan or cash-out refinance) aren’t available to recent homebuyers who haven’t yet built up equity.
If you’re reading this article, someone probably told you the best way to finance your home renovation is with a construction loan. Sorry, but to put it bluntly, you’ve been given bad advice! We get it; you need a lot of money to turn your current home into your dream home, and construction loans sound great because they allow you to borrow based on the value of your home after the renovation is complete.
Refinancing can be one of the dumbest things that homeowners do when paying for home renovations - depending on your personal financial situation. If you’re trying to lock in a significantly lower rate, a cash-out refinance could be a great option for you. But for many homeowners, it can mean throwing money away and getting less out of it. We get that remodeling can be expensive, and tackling your renovation wishlist could mean that you need to borrow $100,000 or more.
If you’re looking for the right way to pay for your home renovation, there’s a chance that you’ve been recommended a number of different options. And the sheer number of different ways to finance home improvements can, in itself, cause confusion. Maybe you’ve seen that your bank is offering home improvement loans? Been told to go and look into a construction loan? Or even that a home renovation loan could let you borrow based on your home’s future value?