If you want a single loan to purchase and renovate a property, two of the most popular options are HomeStyle loans and 203(k) loans, which are supported by the FHA. With knowledge on both of these choices, you can make the right decision for your purchase and renovation.
Renovation Loans Comparison: HomeStyle vs 203(k) Loans
Understanding HomeStyle Loans
Created by Fannie Mae, the HomeStyle program is used to purchase and renovate a property, and they can be used by real estate investors or homeowners who want to purchase a home and make significant changes to the home and surrounding landscape. They can be used for single family homes, or properties with up to four units.
Fannie Mae advertises HomeStyle renovation loans as “simple,” “flexible,” and “affordable” loan options. They have standard pricing and execution, allowing borrowers to get the money they need before a project has commenced, and they allow for a wide range of home-improvement projects ranging from updating a bathroom to patching a leaky roof.
Understanding FHA 203(k) Loans
For many borrowers looking to purchase a fixer-upper, the 203(k) program is the best option. These loans allow borrowers to purchase a home that needs improvements, and it generally allows borrower to qualify with a lower income and a smaller down payment.
Offered by the FHA, which is part of the Department of Housing and Urban Development, FHA 230(k) loans come in streamlined and regular versions. The streamlined option is meant for homes that don’t need structural repairs, while the regular version is for homes that need complicated construction work.
HomeStyle vs 203(k) Loans: Which is Right for You?
Borrower Qualifying
For some borrowers, the simple issue of getting approved is most important, and while neither of these loans are excessively restrictive, you will usually find that 203(k) loans are easier for qualification, largely because they are supported by the FHA, which is more focused on supporting low-income borrowers. Credit requirements, for example, are more lenient with 203(k) than HomeStyle loans. The FHA allows lenders to write 203(k) loans to borrowers with credit scores as low as 580, depending on the specifics of the loan and borrower. However, a HomeStyle loan will require that you have at least a 620 score to qualify, which can eliminate many borrowers. Some lenders may accept smaller credit scores, but you will generally find that 620 is the minimum for HomeStyle loans.
- Winner: 203(k) Loans
Down Payment Requirements
While there is always a benefit to bringing a down payment if you can, many borrowers need low-down-payment options.
If you get a 203(k) loan, you will be under the same requirements as an FHA loan, which has a down payment requirement of 3.5%. For many people, this is an easy and affordable down payment, and because FHA loans are often designed for low-income individuals who need assistance breaking into homeownership, it offers many flexibilities that you might not find with other products.
The HomeStyle loan from Fannie Mae, on the other hand, requires at least 5% for all loans. 5% seems like a small number, but it represents $5,000 for every $100,000 in property value. So if you were to purchase a home worth $300,000, you would need a $15,000 down payment. If you were to use a 203(k) loan for the same property, you would need only $10,500; still a large number, but certainly more attainable.
- Winner: 203(k) Loans
Loan Limits
For a HomeStyle renovation loan, the amount that you borrow cannot exceed Fannie Mae’s limit for a conventional first-lien mortgage, which is at least $484,350 in most areas, while high-cost areas can get up to $726,525. In San Diego, the limit for these loans is $690,000 for 2019.
For a 203(k) loan, the limit is the lesser of three numbers:
- Purchase price plus rehabilitation costs
- As-is value of the property plus rehabilitation
- 110% of the after-improved value times the LTV factor or less the allowable down payment
- Winner: Draw
Available Projects and Properties
There are plenty of projects that you can complete with either of these loan products, but while a 203(k) loan will cover practically everything that most people need, the HomeStyle offers a broader variety of options.
According to the website for the Department of Housing and Urban Development (which oversees the FHA), using a 203(k) loan allows you to make structural improvements, “modernizations,” repair safety issues, and even make changes that improve the visual appearance of the home. From repairing roofs to making energy-conservation improvements, these loans allow for many different changes.
With HomeStyle loans, however, you can do all that and more. There are no restrictions on types of improvements, which means you can complete virtually any home-improvement project you desire with money from a HomeStyle loan. With these loans, there are no restrictions for the occupancy status of the home; restrictions that are often found with 203(k) loans.
A HomeStyle loan also allows you to purchase and improve a larger variety of properties. With a 203(k) loan, you can only purchase a home that will be your primary residence, which will usually be a single-family home. (You may be able to purchase a multi-unit property if you plan to live there.) A HomeStyle loan, on the other hand, allows for multiple purchases, including a home residence, a rental property, and a vacation home.
- Winner: Homestyle Loans
Mortgage Insurance
While both have mortgage-insurance requirements, Fannie Mae’s HomeStyle option tends to have more affordable and lenient insurance requirements. With a 203(k) loan, you will usually have to pay more upfront, and the program requires a flat percentage towards mortgage insurance every month. Also, the 203(k) loan has mortgage insurance that cannot be cancelled, while the HomeStyle allows for flexible mortgage insurance based on credit and loan-to-value ratio.
- Winner: Homestyle Loans
Helping You Make the Right Choice on a Renovation Loan
If you want more information on 203(k) loans compared to HomeStyle, contact the team at San Diego Purchase Loans today!
