Many homebuyers like to purchase a fixer-upper and rehab it themselves, resulting in getting a lower price for the home and immediately building equity. Fortunately, there are multiple options for a renovation mortgage, which allows a buyer to finance the home and the renovation with a single home loan.
203(K) and HomeStyle home loans allow homebuyers to borrow money based on the estimated improved value of the property, not the pre-renovated appraised value. The buyer, therefore, gets a home loan with a mortgage that includes the renovation costs.
Nerd Wallet breaks down the difference between the two:
- FHA 203(K) loans are mortgages insured by the Federal Housing Administration.
- HomeStyle loans are mortgages guaranteed by Fannie Mae.
The benefit is that both loans are one-time close mortgages, which means that homebuyers apply for one loan with one set of documents and one closing cost. While these loans may not cover all renovations necessary, it’s a good start.
HomeStyle Home Loan vs. 203(K) Home Loan: Breaking Down the Mortgage Costs
With a HomeStyle loan from Fannie Mae, home buyers can put less than the traditional 20% down, though private mortgage insurance (PMI) is required.
- HomeStyle: Down payment can be as low as 3%.
- 203(K): Down payment can be as low as 3.5%.
Although a HomeStyle loan requires mortgage insurance when making less than a 20% down payment, it does not require an upfront mortgage insurance premium, unlike FHA loans that come with an upfront fee of 1.75%.
Furthermore, monthly mortgage insurance for a HomeStyle loan may cost less than a 203(K) home loan, because it varies based on down payment and credit score.
And lastly, HomeStyle mortgage insurance drops once you have 22% equity, unlike FHA mortgage insurance which is permanent as long as you have the mortgage.
HomeStyle Home Loan vs. 203(K) Home Loan: Flexibility
For homebuyers who care about flexibility, the 203(K) home loan tends to have more flexibility in the guidelines for borrowers to follow, but they are stricter when it comes to the guidelines for the property. With these loans, borrowers are able to qualify with lower FICO scores and higher debt-to-income ratios. However, the property renovation must be a primary upgrade, and there are restrictions against luxury improvements.
HomeStyle loans are a bit broader in scope: they cover primary, rental, and vacation properties. They are more difficult to get than a 203(K) loan, requiring a higher credit score and lower debt-to-income ratio.
For many people, the best (and only) option is to choose the 203(K) renovation home loan. This is because buyers can qualify with a lower income, they have the ability to renovate condominiums, and they can qualify with a lower credit score.
Overall, both the 203(K) and HomeStyle renovation home loans are good options for homebuyers who want to buy and renovate a home. To find out which is best for you, consult your mortgage broker.
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.