Two little-known home renovation mortgage programs offer solutions for buyers and homeowners who want to renovate.
Fannie Mae and the Federal Housing Administration have home-renovation mortgage programs that allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed. Homeowners can also use both programs to refinance their existing mortgage, plus the renovation costs, into one loan.
FHA's 203(k) program and Fannie's HomeStyle Renovation Mortgage have been around for years.
The FHA insured 22,491 home renovation mortgages in the 2010 fiscal year — more than six times the number it insured in 2007, according to the agency's latest report on 203(k) loans.
Unlike credit lines, these renovation loans require borrowers to show the money was spent on the house. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection before a "draw" — when a portion of the money is disbursed to the contractor. Borrowers have up to six months and five draws to finish a project. The HomeStyle program does not require a consultant to monitor the work, only an initial and final inspection.
While rehab loans involve more work than traditional mortgages, they can help those who want to buy discounted homes that need repair.
Which loan is better? It depends on the situation.
Those who don't have great credit should probably opt for an FHA 203(k). Most HomeStyle lenders require a credit score above 680. To get the best rate on a HomeStyle mortgage, borrowers need to have a minimum 740 credit score.
For borrowers with credit scores lower than 740, it's best to compare estimates.
FHA does not set a minimum score requirement for 203(k) loans, but many lenders require a score of 640 or greater. There are a few exceptions, and some lenders accept scores as low as 600.
Under the FHA's 203(k) program, borrowers can get a mortgage with a down payment as little as 3.5 percent. HomeStyle requires a minimum 5 percent down payment.
The FHA 203(k) program is available only for owner-occupants. The HomeStyle program allows investors.
The 203(k) rehab mortgage must comply with FHA loan limits. The limit varies by county but is $271,050 in most places. In high-cost areas, the limit is as a high as $625,500 starting Oct. 1.
With a 203(k) loan, borrowers can get up to 110 percent of the home's appraised value, compared with 95 percent for a HomeStyle loan. Both appraisals are based on what the house is expected to be worth after repairs.