Renovation Loans
Getting a Mortgage Loan for a Fixer-Upper
The idea of buying a fixer-upper and turning it into your dream abode can seem so perfect — every nook and cranny just to your specifications! The reality, however, can be harsh. When you realize how much it will cost to remodel, you often also realize that you can’t afford it. Or you find out that a lender won’t give you a loan because the home is considered “uninhabitable” as it is.
FHA and FannieMae both have loan options that will allow you to create your dream home!
Click on the button below for more information on each loan.
FHA 203k Loans
An FHA 203k loan is a loan backed by the federal government and given to buyers who want to buy a damaged or older home and do repairs on it. Here’s how it works: Let’s say you want to buy a home that needs a brand-new bathroom and kitchen. An FHA 203k lender would then give you the money to buy (or refinance) the house plus the money to do the necessary renovations to the kitchen and bathroom.
Often the loan will also include: 1) an up to 20 percent “contingency reserve” so that you will have the funds to complete the remodel in the event it ends up costing more than the estimates suggested and/or 2) a provision that gives you up to about six months of mortgage payments so you can live elsewhere while you’re remodeling, but still pay the mortgage payments on the new home.
Which Repairs Qualify On an FHA 203k Loan?
There are two main types of FHA 203k mortgage loans. The first is the regular or Standard 203k, which is given for properties that need things like structural repairs, remodeling, a new garage, or landscaping; the second is the Limited (or streamlined) 203k, which is given for energy conservation improvements, new roofing, new appliances, or non-structural repairs such as painting.
Among the other repairs that an FHA 203k will cover:
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decks
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patios
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bathroom and kitchen remodels
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flooring,
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plumbing
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new siding
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additions to the home such as a second story
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heating and air conditioning systems
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And more
The program will not cover so-called “luxury” improvements such as adding a tennis court or pool to the property. It also does not cover any improvement that does not become a permanent part of the property.
How Much Can I Borrow With an FHA 203k Loan?
The maximum amount of money a lender will give you under an FHA 203k depends on the type of loan you get (regular vs. streamlined and purchase vs. refinance loan).
With a Standard FHA 203k, the minimum amount you can borrow is $5,000.
With a Standard FHA 203k loan, the maximum amount you can get on a purchase loan is the lesser of these two amounts:
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The Nationwide FHA Mortgage Limits
OR
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The appropriate Loan-to-Value (LTV) ratio from the Purchase Loan-to-Value Limits, multiplied by the lesser of:
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110 percent of the After Improved Value (100 percent for condominiums), or
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the Adjusted As-Is Value, plus the following:
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Financeable Repair and Improvement Costs, for Standard 203(k) or Limited 203(k);
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Financeable Mortgage Fees, for Standard 203(k) or Limited 203(k);
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Financeable Contingency Reserves, for Standard 203(k) or Limited 203(k); and
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Financeable Mortgage Payment Reserves, for Standard 203(k) only.
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Refinance limits are similar but also take into account the amount of the existing debt and fees of the existing loan.
With a Limited FHA 203k loan, you can get a loan for the purchase price of the home plus up to $35,000 with no minimum repair cost plus the cost for energy improvements. To determine the as-is value of the property or the estimated value of the property post-repair, you may need to have an appraisal done. You will be required to put down 3.5 percent, but the money can come from a family member, employer or charitable organization.
What Kind of Properties Qualify for an FHA 203k Loan?
Qualifying homes for a FHA 203k loan include:
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A one- to four-family home that has been completed for a least a year
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A home that has been torn down, provided that some of the existing foundation is still in place
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A home that you want to move to a new location
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The home cannot be a co-op, but some condos are eligible
Your property will also have to qualify under the usual FHA requirements. For example, its value cannot exceed a certain maximum amount, which depends on where you live.
What are the Pros and Cons of FHA 203k Loans?
The main benefit of these loans is that they give you the ability to buy a home in need of repairs that you might not otherwise have been able to afford to buy. Plus, the down payment requirements are minimal, and often you get decent interest rates.
The downsides are that not all properties qualify, there are limits on the funding you can get and applying for this loan requires a few more steps than other loans. For example, to apply for the loan you may need to hire an independent 203k consultant to prepare the exhibits required (to get the loan, you have to provide a detailed proposal of the work you want to do and cost estimates for each item).
Fannie Mae HomeStyle Loans
The Fannie Mae HomeStyle Renovation (HSR) mortgage provides a convenient and economical way for borrowers considering moderate to elaborate home improvements to make repairs and renovations with a single-close first mortgage (up to 50% of the As Improved Value), rather than a second mortgage, home equity line of credit, credit card or other more costly methods of financing. This product is available for both those wanting to purchase a new home and those wanting to refinance their existing home.
The HomeStyle loan is also eligible to be used on not only owner-occupied homes, but also investment properties and 2nd homes!
Which Repairs Qualify for a Fannie Mae HomeStyle Loan?
Any repairs, improvements, and modifications are allowed (up to 50% of improved value), as long as they are permanently attached to the property and add or maintain value. Luxury items are allowable as well.
Among some of the repairs that can be done with a HomeStyle loan include:
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Foundation repairs
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Any structural repairs
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Decks
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Patios
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Add a swimming pool or outdoor living area
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Bathroom and kitchen remodels
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Flooring
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Plumbing/Electrical improvements or repairs
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New siding
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Additions to the home such as a second story or increase the footprint
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Heating and air conditioning systems
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And more!
How Much Can I Borrow on a Fannie Mae HomeStyle Loan?
The maximum amount of money a lender will give you under a Fannie Mae HomeStyle Renovation loan is $453,100. This will include the purchase price (or payoff amount) plus the repairs/improvements and fees. You can also include payments if the home can’t be occupied during the renovation!
Below is a list of the maximum Loan To Values allowed on the various property types:
Owner Occupied:
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Purchase and Refinance: 1 Unit: 95%; 2 Units: 85%
Second Homes:
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Purchase and Refinance: 1 Unit only: 90%
Investment Property:
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Purchase: 1 Unit Only: 85%
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Refinance: 1 Unit Only: 75%
The Loan to Value ratios above are calculated in the following way:
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Purchase transactions: (LTV) ratio is based on the lesser of 1) purchase price and cost of renovation, or 2) the “As-Completed” value.
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Refinance transactions, the LTV ratio is determined by dividing the original loan amount by the “as completed” appraised value of the property.
What Kinds Of Properties Qualify for a Fannie Mae HomeStyle Loan?
Qualifying homes for a Fannie Mae HomeStyle loan include:
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A one- to two-family home that has been completed for a least a year
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A home that has been torn down, provided that some of the existing foundation is still in place
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A home that you want to update. The appraiser does not need to REQUIRE the improvements, you may just want to change the home.
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The home cannot be a co-op, but some condos are eligible
Your property will also have to qualify under the usual Fannie Mae requirements .