Financing Home Improvements: FHA 203k vs. Conventional

Posted by Laine Smith on 5/7/15 9:00 AM

Topics: Home Buying

As with any home loan, conventional and FHA 203k loans fill unique needs for different homebuyers and different home purchases. If you are already familiar with an FHA 203k loan, you know that it's an option for homebuyers and homeowners looking to finance home renovations into their mortgage. While conventional loans typically only finance the purchase of a home, there is a Fannie Mae HomePath® Renovation Loan that works similarly to a 203k loan.

203k_vs._Conventional

Financing Home Renovations

There are two types of FHA 203k loans: regular and streamline, both of which can be used for purchase or refinance but only on primary residences.

203k Streamline

  • Used for homes needing minor, non-structural repairs
  • Financing up to $35,000 in improvements before move-in
  • No minimum repair costs
  • Can be used for improvements such as repair/replacement of roofs, gutters, downspouts, HVAC systems, plumbing and electrical systems, flooring, exterior decks, patios and porches, minor kitchen/bathroom renovations, etc.

203k Standard

  • Used for homes needing major rehabilitation
  • Renovation costs may exceed $35,000; minimum of $5,000 worth of repairs
  • Eligible improvements include all of 203(k) Streamline improvements as well as structural alterations, such as room additions, major kitchen and bathroom remodeling, basement refinishing, etc.

The HomePath® Renovation Mortgage was developed for homebuyers and real estate investors wishing to purchase foreclosed properties owned by Fannie Mae in need of heavy work or repair. Via HomePath® Renovation, a borrower can purchase a home and simultaneously finance renovations, reducing borrower closing costs. HomePath® is available for both owner-occupants and investors and allows borrowers to finance up to 35% of the appraisal, as-completed value for repairs, up to $35,000.

If you’re purchasing a non-Fannie Mae owned property in need of repairs, renovation or remodeling (and are financing conventionally) you will need to exhaust other options to pay for those items, such as saving the funds, financing through credit cards or opening a home equity line of credit (HELOC). Depending on loan status, current homeowners wishing to fund home improvements can also explore the option of refinancing with a cash-out.

Down Payment and Private Mortgage Insurance

FHA 203k loans allow borrowers to finance up to 96.5% of the appraised value of their home (based on the value when the improvements or repairs are completed). This requires a 3.5% down payment.

Fannie Mae’s HomePath® Renovation Mortgage requires a 5% down payment from borrowers.

Conventional financing is available to borrowers with as little as 3% down through Fannie Mae's MyCommunityMortgage®, which can be entirely gifted from a relative or government grants.

With conventional financing, a borrower could avoid the cost of private mortgage insurance if they put down 20% on their purchase. FHA 203k and HomePath® borrowers don't have that luxury because of the low down payment option.

For more information about financing a home in need of renovations, rehab or improvements, download our free Guide to Home Rehab & Construction Loans.

Download: Rehab & Construction Guide

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