Construction

You see the diamond in the rough. You see the home of your dreams just waiting to emerge. You see the foreclosure that needs a little love. But to give your home the TLC it needs costs hard-earned cash—and that’s where a renovation mortgage comes into play.

There are two not so well known renovation mortgage programs. Both offer renovation finance solutions for buyers and homeowners.

Both Fannie Mae’s HomeStyle Renovation Mortgage and the Federal Housing Administration’s (FHA) 203(k) programs allow a buyer to borrow based on the home’s expected worth – post completed rehab costs. Additionally, homeowners can use both programs to refinance their existing mortgage, adding in the necessary renovation costs, for the final result of carrying one loan.

It wasn’t until recently that these two programs have become more popular. In the past, most borrowers could easily qualify for a second mortgage. Times they have a- changed.

How Renovation Mortgages Work

Unlike an open line of credit, which you can use as you please, renovation mortgages require you to show the borrowed money was spent on the house. In the case of a standard FHA 203(k) loan, you’re required to hire a consultant. The consultant is responsible for assessing the construction plan and performing an inspection before each draw is made.

A “draw” is when a portion of the loan is given to the contractor. You have a maximum of six months to finish your renovation project and are permitted a maximum of five draws. While Fannie’s HomeStyle program requires an initial and final inspection, it does not require the constant monitoring of your renovation progress.

What Else Differentiates a 203(k) Mortgage From a HomeStyle Mortgage?

Credit Requirements: Typically, the credit requirements for a 203(k) loan are lower than those of a HomeStyle loan. How much lower? Significantly. While credit minimums are determined by a variety of factors, some lenders are able to offer 203(k) loans for as low as 640. In comparison, most HomeStyle lenders require a minimum score of 680. And to receive the best rate on a HomeStyle loan, borrowers must typically have at least a 740 credit score.

Home Occupancy: While borrowers can qualify for a 203(k) loan with as little as 3.5 percent down, they are required to be owner-occupants. HomeStyle loans require a minimum of five percent down, but allow for investor borrowing.

Are There Any Restrictions?

Yes, for 203(k) loans borrowers are not able to use the money for luxury items such as the addition of a swimming pool or spa. However, HomeStyle loans allow for such upgrades.

Interested in discovering the diamond in the rough? Want to renovate your house into the home of your dreams? Have additional questions about renovation mortgages? Contact one of our Loan Officers today.