FHA 203(k) Loan
Did you know that the Federal Housing Administration (FHA) has a special loan for home improvements? It’s called the FHA 203(k) Loan, a popular choice among homeowners looking to renovate or home buyers purchasing a home they want to renovate.
How does an FHA 203(k) loan work?
The FHA 203(k) loan combines the cost of your home purchase or the outstanding balance of your home plus the renovation costs into one single mortgage.
This means it’s perfect for those who are buying a fixer-upper or those who want to include the costs of their home improvements in their mortgage.
It may also come with lower interest rates and a more relaxed credit score requirement compared to other loan types, making it a splendid option for those with less-than-perfect credit.
Examples of FHA 203(k) Eligible Projects
The versatility of the FHA 203(k) loan lies in its wide range of eligible home improvement projects. Here are some renovations you can undertake with this loan:
- Kitchen and Bathroom Remodels
- HVAC, Plumbing, and Electrical Systems
- Structural Alterations and Reconstruction
- Energy Conservation Improvements
- Major Landscaping
- Accessibility Improvements
Conforming Loans:
Fannie Mae HomeStyle Renovation Loan and the Freddie Mac CHOICERenovation loan
Unlike the FHA 203(k) loan, which also finances renovations, these Conforming Loans come with an added flexibility. They can be used not only for primary residences but also for second homes and investment properties. Thus, these loans significantly expand the range of properties for which home improvement financing can be obtained.
Fannie Mae HomeStyle Renovation Loan Requirements
- Credit Score: A minimum credit score of 620 is required for the Fannie Mae HomeStyle Renovation Loan. A higher score of 780 or above is needed to secure the lowest rates.
- Down Payment: The down payment depends on the property type and occupancy. It ranges from 3% for a one-unit primary residence to higher percentages for multi-unit and investment properties.
- Loan Limits: The loan amount is based on the estimated after-improved value of the home. Take the completed value of the project when determining the total loan amount, up to 75% of either the purchase price plus renovation costs or the “as-completed” appraised value, whichever is lower. For manufactured housing, eligible renovation funds cap at the lesser of $50,000 or 50% of the “as-completed” appraised value.
Freddie Mac CHOICERenovation Mortgage Requirements
- Credit Score: The credit score requirement is determined by the lender but usually ranges from 620 to 660.
- Down Payment: Similar to the HomeStyle loan, the down payment for the Freddie Mac CHOICERenovation Mortgage varies and is based on the lender’s requirements.
- Loan Limits: The loan limits for the Freddie Mac CHOICERenovation Mortgage are also based on the property’s after-improved value. Borrowers can finance renovations that cost up to 75% of a home’s value after being fixed up, as long as they qualify for the total loan amount. If your house is valued at $300,000 after improvements, you could potentially borrow as much as $225,000 (75% of $300,000) for your home improvement project, provided you qualify for the total loan amount.
Shopping around for lenders who provide Fannie Mae HomeStyle Renovation Loan and Freddie Mac Renovation Mortgage is highly advisable.
Different lenders may offer varying interest rates, fees, and loan terms, so it’s crucial to explore multiple options to find the best fit for your financial situation. Some lenders might also have more stringent criteria or additional features that could impact your loan application.
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