How do I know if a RenoFi loan is right for my project?
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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.
Both allow you to refinance and renovate a property to help you turn it into your dream home, but there are a few notable differences that could make Fannie Mae Homestyle renovation loans the better choice over an FHA 203k for some homeowners.
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 what your financing options are.
Chances are you’ve heard of Fannie Mae HomeStyle or FHA 203K renovation loans, but aren’t sure how these loans work when carrying out home improvements on your current home.
In this guide, you’ll learn how these two types of renovation loan compare, as well as learning about RenoFi Loans, an alternative that could be better suited to your needs.
We’ll look at:
An An FHA 203k loan or a Fannie Mae HomeStyle loan might not be the best way for you to finance your home purchase and renovation.
Speak to a RenoFi Advisor today to talk through your options.
What Are FHA 203k & HomeStyle Renovation Loans?
Both FHA 203k and HomeStyle renovation loans allow you to finance the purchase or refinance and renovation of a home in a single loan.
These mortgages let you borrow against your home’s future value, increasing your borrowing power when compared to a traditional home equity loan or line of credit.
Whether you’ve fallen in love with a fixer-upper and want to purchase the house and turn it into your dream home, or have a lengthy wishlist of renovations to turn your existing property into the perfect space for you and your family, these loans can help you to do that now.
Just think about it this way…
You either buy a new house that you’ve found using a traditional mortgage, carry on living in your existing home knowing it needs work, carry out renovations a bit at a time over many years, or you find a financing option that lets you do everything right away.
And the extra borrowing power that comes with borrowing against your home’s future value makes it easier to get the full amount you need now, rather than having to make compromises on which projects you undertake and which have to wait until another time.
Key Points of Fannie Mae Homestyle & FHA 203k Loans When Renovating
You borrow based on your “after renovation value” (ARV) - This biggest differentiator of both Homestyle and FHA 203K 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 to remodel.
It replaces & pays off your existing mortgage - If being used to renovate an existing home, you will be required to refinance your existing mortgage when taking out an FHA 203k or Fannie Mae Homestyle loan.
And in order to do so, you have to pay it off. Both of these renovation 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 - Keel in mind that both HomeStyle and FHA interest rates range from .5% to 1% higher than traditional mortgage rates, meaning higher monthly payments.
You will need to employ a HUD consultant - If the loan amount is over $35,000 or if there is structural work being completed. This consultant will act in the role of project manager on the renovation.
How Much Can I Borrow?
For primary residences, Fannie Mae HomeStyle Loans let you borrow up to 95% of the ARV of the home up to a limit of $548,250 (or $822,375 in high-cost markets).
So if your home will have an after renovation value of $500k, you can borrow up to $475k.
But if you owe $375k on your first mortgage, you would only be left with $100k to pay for renovations and closing costs.
Similarly, a FHA 203k Loan allows you to borrow up to 97.75% of the home’s ARV on a refinance, up to $431,250.
Programs for second homes and investment properties also exist with lower Loan-to-Value (LTV) ratios.
How 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.
Here’s how the process works…
Make a list of the specific renovations you want to do.
Hire a contractor/architect and finalize your renovation plans and submit these to your chosen lender. With these types of loans, you’ll need to make sure that you know exactly what you want to do, and the budget, before you submit the plans.
(Send all estimates to a HUD consultant, they perform a specification of repairs, which is an evaluation of the estimate to make sure that you’re being charged the right amount of money for the renovation by the contractor.)
The lender will then perform an appraisal based upon the after renovated value of the property.
After the loan closes, the lender will place the renovation funds in an escrow account. If your renovation amounts are greater than $35,000, or structural in nature, a HUD consultant must be hired to authorize the release of the funds. The funds can only be released after a progress inspection from the HUD consultant.
The lender manages draws based upon these inspections (intervals at which contractors can request funds). These inspections are carried out to determine where a project is in relation to the proposed timeline and that the construction work matches the initial plan. Then when renovation work is completed, the lender will conduct a final inspection to check that the project has been undertaken to the original specification and release the final funds to your contractor.
What Do I Need To Apply For These Loans?
For both FHA 203k’s and HomeStyle Loans, prior to closing on the loan, you’ll need to provide:
- Cost Estimate - a formalized estimate written by your 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.
To learn more about cost estimates, income & asset verifications or homeowners insurance, take a look at RenoFi’s Application Checklist Guide. Many of the documents required to apply for a RenoFi Loan are the same for FHA 203k and Fannie Mae Homestyle loans.
Why Are Fannie Mae HomeStyle Loans Better Than FHA 203ks When Renovating?
Here’s a side-by-side comparison on what you need to know to compare these loans and decide which loan is better for you:
|FHA 203k Loan||Fannie Mae HomeStyle Loan|
|Eligible property types|
|Credit score required||580+||620+|
|Max debt-to-income ratio||50%, or meet Automated Underwriting System (AUS) approval.||45%, or meet Automated Underwriting System (AUS) approval.|
|Mortgage insurance premium||Upfront of 1.75% of the loan amount & .8% monthly||No upfront MIP. As low as 0.4% monthly. This can be removed after 12 years or with proof of at least 20% equity.|
|Mortgage limits||Varies. See FHA Mortgage Limits.||$548,250. ($822,375 in high-cost areas.)|
|Time limits||Renovations must be completed within six months of closing the loan||Renovations must be completed within six months of closing the loan|
|Restrictions on improvements||Yes||No|
While each loan’s benefits depend on your personal financial situation, here are the biggest things to note that Fannie Mae Homestyle Renovation Loans have to offer over 203ks:
- No Upfront Mortgage Premium - Unlike an FHA 203k, Fannie Mae HomeStyle loans don’t require an upfront Mortgage Insurance Premium (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 a Fannie Mae HomeStyle.
- Lower Mortgage Insurance - These premiums are half of most loan alternatives, including FHA (.4% vs .8%). So again, with that loan of $400k you’ll save yourself $1,600 with Fannie Mae.
- Mortgage Insurance Costs Are Removed After 12 Years - This .4% MIP can be removed after 12 years, or even sooner with proof of at least 20% equity in the product. This is in comparison to a 203k, which has a Lifetime Mortgage Insurance requirement, which means 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, Depending On Your Location - If you need to borrow more money, a Fannie Mae HomeStyle Loan can get you up to $548,250 for your renovation versus only $431,250 with a FHA 203k loan (although it varies by location).
Really what this comes down to is being able to meet the higher qualification criteria of a HomeStyle loan - namely, the credit score.
203k Loan vs HomeStyle Loan: Which Is Right For You?
If you have a lower credit score, a 203k is going to be the only available option, but this will still allow you to finance your renovation and is one of the reasons why these remain popular alongside HomeStyle loans.
But if you can qualify for a Fannie Mae HomeStyle renovation loan, the benefits (mentioned above) are incomparable in the long run.
That said, it’s nice to know you also have other options. And we’d encourage you to explore these.
If you’re looking to increase your borrowing power, both the Fannie Mae HomeStyle and FHA 203k 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, and the good news is you have options.
A 203k or HomeStyle isn’t the only way to finance a renovation based on your home’s after renovation value, and there’s a good chance that an alternative option could be better suited.
What Are The Downsides of Homestyle and 203k Loans?
There are also some negatives to Fannie Mae HomeStyle and FHA 203k loans when you’re planning to renovate your home.
Here’s what we mean:
If you’re using one of these loans to purchase and renovate a property, let’s acknowledge that no one likes having to make BIG decisions under the stress of a ticking clock.
With Fannie Mae HomeStyle 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!
You need to make sure you’ve explored all of your options before choosing the best way to finance your renovation.
Homeowners aren’t always aware of all of the renovation loan options that are available, and that’s where we can help.
Just be careful when considering alternatives; many financing options that are marketed as ‘home improvement loans’ are actually high-interest personal loans that will increase your payments and limit your borrowing power.
What we’re talking about here are true renovation loans that let you borrow based on your home’s future value.
Let’s introduce you to RenoFi Loans.
Introducing RenoFi Loans - An Alternative To FHA 203k & Fannie Mae HomeStyle Renovation Loans
If you’re considering either an FHA 203k Loan or a Fannie Mae HomeStyle loan, either to purchase a fixer-upper and pay for repairs or to refinance and renovate your existing home, a RenoFi Loan could offer a better alternative.
A RenoFi Loan is a newer type of home renovation loan that can provide the ease of a home equity loan with the borrowing power similar to a FHA 203k or Fannie Mae Homestyle loan.
This means that RenoFi’s Renovation Home Equity Loan can offer the same benefits of Fannie Mae HomeStyle Loans without the need to refinance, plus even lower insurance costs.
Here’s how they compare to other home renovation loans, including both HomeStyle and 203ks:
|Renovation Home Equity Loan||Single-Close Construction To Permanent Loan (CTP)||Fannie Mae HomeStyle Loan||FHA 203k (Full)||Two-Close Construction To Permanent Loan (CTP)|
|Is this a mortgage?||Yes||Yes||Yes||Yes||Yes|
|1st or 2nd mortgage?||2nd||1st||1st||1st||1st|
|Require refinance of existing mortgage?||No||Yes||Yes||Yes||Yes|
|Typical Interest Rate||Market||Above Market||Above Market||Above Market||Above Market|
|Loan Limit (Renovation Cost + Mortgage)||$500,000||Jumbos allowed||Conforming only||Conforming only||Jumbos allowed|
|Loan Term (max)||20 years||30 years||30 years||30 years||30 years|
|Credit Score Required||640+||700+||620+||580+||580+|
|Loan to Value||Up to 95%||Up to 95%||Up to 95%||Up to 96.5%||Up to 80%|
|Can be used for building new home?||No||Yes||No||No||Yes|
|Restrictions on type of improvements?||No||No||No||Yes||No|
The main things you need to know about RenoFi Home Equity Loans are:
- You can borrow between $20k and $500k
- Terms of up to 20 years
- Ability to borrow up to 95% of your home’s after renovation value
- The full loan amount is available at closing
- You won’t need to refinance your existing mortgage
A RenoFi Loan can help you to borrow the most money for your renovation with the lowest monthly payments.
Schedule a call (or chat online) with one one of our advisors today and they’ll be more than happy to look at your options with you and talk you through how this could be better for you than a HomeStyle or 203k.