Finding the Right Financing Option for Home Renovations

Posted by Laine Smith on 10/1/15 11:25 AM

In a perfect world, homeowners and homebuyers would have the cash on-hand to turn their fixer-upper into the home of their dreams. In the real world, most homeowners need some type of financing to turn their renovation plans into a reality.

Home Renovation Costs

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Here are three loans that allow homebuyers and homeowners to combine the costs of their home improvements with their home loan.

FHA 203(K)

Because of its diversity, the FHA 203(K) loan is one of the most popular home improvement loans. The FHA 203(K) loan fills a specific need for homebuyers in today's housing market. Most loan options will not allow closing unless the condition and value of the property is permanent and therefore, secure. An FHA 203(K) loan allows borrowers to get just one mortgage loan to finance both the ownership of the property and the costs of renovation or rehabilitation.

There are two types of FHA 203(K) loans, regular and streamline, both of which can be used for a purchase or refinance as long as the home is borrower-occupied. Both FHA 203(K) loan types require a 3.5% down payment of the sale price plus renovation costs or mortgage balance plus renovation costs for refinanced mortgages.

203(K) Streamline

  • Used for homes needing minor, non-structural repairs
  • Allows borrowers to finance up to $35,000 in improvements before move-in
  • No minimum repair costs
  • Examples of eligible improvements include: repair or replacement of roofs, gutters, downspouts, HVAC systems, plumbing and electrical systems, flooring, exterior decks, patios and porches, minor kitchen and bathroom renovations, window and door replacements, exterior re-siding and basement waterproofing.

203(K) Standard

  • Used for homes needing major rehabilitation
  • Renovations costs can exceed $35,000
  • Must be a minimum of $5,000 worth of repairs
  • Loan limits are based on property type and location
  • Eligible improvements include all 203(K) Streamline improvements, as well as structural alterations, such as room additions, major kitchen and bathroom remodeling, finishing a basement, repair of termite damage, etc.

HomeStyle® Renovation Loan

Fannie Mae's HomeStyle® Renovation loan is available for financing primary and secondary homes, as well as investment properties. HomeStyle® is a great option for homebuyers purchasing a fixer-upper or homeowners who need to finance repairs, renovations, and home or energy efficient improvements with a down payment as little as 5% of the home's value after repairs. Down payment requirements vary based on the number of units and home type (primary, secondary or investment home).

HomeStyle® benefits include:

  • No minimum amount in repairs required
  • The inclusion of luxury items, such as swimming pools, tennis courts, and landscaping
  • As-complete appraisal allows no or low equity homeowners to obtain a renovation refinance
  • No upfront mortgage insurance
  • Allows renovation costs up to 50% of the as-completed value
  • Available in fixed-rate mortgages or rate-capped ARMS, fully amortizing with terms between 15 and 30 years

If you're interested in financing home improvements, repairs or other home rehabilitation projects, contact one of our mortgage bankers to determine what loan type fits your individual needs.

For more information about the renovation loan types available to you, download our free Rehab & Construction Guide.

Download: Rehab & Construction Guide

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