Home Renovation Loans
203K Renovation Loans
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Renovation mortgage loan products have become popular options for homebuyers looking to put their own touch on a home. This loan type is also beneficial when the inventory of homes in your area, like State College, PA and the Centre County region is low and it’s difficult to find what you need in a home. Another option for a renovation loan is using the product during a refinance to mortgage the funds needed to repair an aging home. From structural remodels to new paint, a renovation home loan might just be the answer to your home search.
For borrowers who do not have the capital to purchase a home and fix it up, a renovation home loan offers them the opportunity to roll their repairs into their primary mortgage. There are a couple different options for the borrower seeking a renovation loan, including the FHA 203K program, and Fannie Mae’s HomeStyle renovation mortgage. Below you will find the basics of both, but discussing your options with a mortgage professional, such as a mortgage broker, is important.
FHA 203K: PRODUCT HIGHLIGHTS
FHA 203K renovation mortgages follow the same guidelines as traditional FHA mortgages, with a few variations related to the scope of work. Thus, factors like seller assistance towards closing costs and debt-to-income ratios remain constant throughout the FHA product lineup. There are 2 different 203K mortgage options based upon the repairs or renovations being done to the subject property.
- Seller Assist: Up to 6%
- Agency: Federal Housing Administration
- Max Loan Amount: Depends on the subject property’s location (see link for map below)
- Mortgage Insurance Premium: Varies, but starts at 0.85% of the loan amount with minimum required down payment; continues for the life of the loan if less than 10% provided as a down payment
- Upfront Mortgage Insurance Premium: Required 1.75% of the loan amount; can be financed
- Max Income: No restrictions
- DTI Requirement: 43% but varies by lending bank and can be much higher with an automated underwriting approval. (see link below for more information on automated underwriting)
- Credit Requirement: Fluctuates by lending bank and can be lower with an automated underwriting approval.
- Down Payment Requirement: As low as 3.5%
STANDARD 203K
- Required for structural repair/modification: A standard 203K allows for more cumbersome repairs or renovations with a $5,000 minimum budget
- A licensed contractor provides detailed bid: The appraiser, lending bank, and 203K consultant will analyze the project thoroughly. The contractor must be insured and licensed and will be required to fill out additional paperwork beyond the bid. Their funds are held in an escrow account, a portion paid upfront, and the remaining balance upon completion.
- Must hire a HUD-approved 203K consultant: For all standard 203K projects, the homeowners are required to hire a 203K consultant. Their fee is typically six hundred dollars plus add-ons for fees like mileage. They determine the project’s feasibility through inspecting the property and reviewing bids. During the project, the consultant will visit the property and determine if the work is satisfactory and tells the lender if funds may be released from the escrow account to the contractor.
- Max Loan-to-Value: up to 110% of what the appraiser deems the home’s worth after renovations, or the purchase price of the home plus the renovation costs, whichever is the less amount, minus your minimum 3.5% low down payment
- Ideal for: Adding square footage, creating an open floor plan, adding a garage, removing or repairing an in-ground pool, foundation repairs, rebuilding (if the foundation remains)
- Restrictions: Cannot be used to add a pool; Home must be more than 1 year old
LIMITED 203K
- Maximum budget: A limited 203K has a maximum renovation budget of $35,000 with no minimum budget
- No 203K consultant required: As this renovation loan product is designed for non-structural repairs or renovations, a HUD-approved 203K consultant is not required.
- Max Loan-to-Value: The lesser of the purchase price of the home + the renovation costs, or upwards of 110% of the appraiser’s note of the home’s value after renovations, minus the minimum 3.5% low down payment
- Ideal for: roof repair or replacement, decks, heating or cooling systems, window and siding, plumbing or electrical upgrades, flooring, kitchen remodels including appliance, finishing basements
- Restrictions: Cannot be used to add a pool; Home must be more than 1 year old
PRODUCT HIGHLIGHTS
The main advantage of this renovation product its flexibility. Fannie Mae’s HomeStyle renovation loan is a better option for those that qualify. While it may be more flexible in its use, it is more restrictive in credit score requirements and the down payment is higher than FHA’s similar product. Where an FHA 203K loan must be used on the primary residence, and no “luxury” renovations are allowed, Fannie Mae’s HomeStyle product can be used in many ways as there are no restrictions on the type of improvement. Another advantage of this product is its lack of an upfront mortgage insurance premium and ability to cancel private mortgage insurance at 80% loan-to-value, unlike FHA loan products.
- Seller Assist: Up to 6%
- Agency: Fannie Mae
- Max Loan Amount: Conforming loan limits based upon the home’s location
- Mortgage Insurance Premium: Varies based on several factors but typically between 0.5% and 1% of the loan value; required with less than 20% down payment
- Upfront Mortgage Insurance Premium: None
- Max Income: No restrictions
- DTI Requirement: 43% but varies by lending bank and can be higher with an automated system approval.
- Credit Requirement: Loan-to-value influences the credit score requirements; Less than 20% down, the minimum score is 700; More than 20% down, the minimum credit score is 680. Investment properties require a minimum credit score of 720.
- Down Payment Requirement: As little as 5%
HOW DO I APPLY?
Principle Home Mortgage will discuss the various loan programs and work with you to decide upon your best option. To apply for either type of renovation loan, you will need 2 years tax returns and W2s, 2 months bank statements, 2 forms of ID, and 30 days of pay stubs. If you are self-employed, these requirements will vary slightly. To determine if a renovation mortgage is your best option in State College, PA and the Centre County region, reach out to Principle Home Mortgage at (814) 308-0959 to discuss your home financing needs.
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