Renovation Mortgages, like the Fannie Mae HomeStyle® Renovation & 203(k), are mortgages that permit borrowers to include financing for home improvements in the mortgage transaction of an existing house. Both can be used to acquire and renovate existing properties or to refinance and renovate currently owned properties. Each type of loan has variations in guidelines and borrower qualifications.
THE HOMESTYLE RENOVATION MORTGAGE
The HomeStyle® Renovation Mortgage is a Fannie Mae Conventional loan product that enables the borrower to include financing for home improvements into a purchase or refinance mortgage loan with one closing. The HomeStyle Renovation mortgage provides a simple and flexible way for borrowers to renovate or make home repairs with a conventional first mortgage, rather than a second mortgage, home equity line of credit, or other more costly methods of financing.
The underwriting requirements are similar to those of a typical Conventional loan. Eligible borrowers include individual home buyers and investors. The property need not be owner occupied to qualify for a Homestyle Renovation Mortgage. There are no requirements or restrictions on the types of repairs or remodeling allowed, even luxury improvements are eligible. The borrower may borrow up to 95% (90% for investment properties) of the future value of the home after renovations are made. Loans made at more than 80% of property value require Private Mortgage Insurance. Like other Conventional loans, the mortgage insurance is terminated once the borrower has 20% equity in the home. Eligible property types for a Homestyle Renovation Mortgage are a 1-4 family house, a townhouse, an approved Condominium, or a Planned Unit Development.
The 203(k) is an FHA loan program that enables the borrower to finance the purchase and the renovation/ rehabilitation of a home all in one loan with one closing. The 203(k) loan can also be used to refinance an existing mortgage, adding the costs to renovate or remodel that home. Eligible borrowers may finance up to 96 ½ % of the future value of the home after the renovations have been completed.
The 203(k) loan is for owner occupied properties only. The property must be the home owner's primary residence. Eligible properties include 1-4 family homes, FHA approved condos, and mixed-use properties as long as the improvements are made on the residential portion of the property.
The underwriting guidelines are the same as for other FHA loans, so they are less strict than Conventional loans allowing for lower credit scores, higher debt to income ratios, gifts and sellers concessions. Like all FHA loans, 203(k)s require mortgage insurance for the life of the loan.
There are two types of FHA 203k mortgage loans, traditional and streamlined. The streamlined 203k is used for non-structural repairs under $35,000 such as painting and new appliances. The traditional 203k is for properties that need structural repairs such as a new roof or a room addition. Because they are more complicated in nature, traditional 203(k) loans require the use of an independent HUD 203(k) counselor. Among the other repairs/ renovations that a 203k loan will cover are the construction of a new deck or patio, bathroom and kitchen remodels, flooring, plumbing, new siding, additions to the home such as a second story, new heating and air conditioning systems, etc... The 203k will not cover luxury improvements such as adding a tennis court or pool to the property.