Buying a home that needs some love can be overwhelming. It can also be a smart investment. If you're thinking about buying a fixer-upper, you already know that it's going to take a little elbow grease to make it livable. You probably also know that these types of homes can often be snatched up at bargain prices and in neighborhoods where you want to live. And once it's yours, you can paint, remodel and refresh the property to make it your own. Gourmet kitchen, movie room, home office, party deck - the possibilities are endless.
But how to pay for it?
Consider the Renovation Loan. This home financing option allows you to borrow money to buy your home and remodel it (or refinance your current mortgage) with just one loan. It’s unique because you can borrow the funds you’ll need based on what your house is expected to be worth after the renovation is complete. It’s also budget-friendly: you’re paying a lot less out-of-pocket to fund your remodeling projects and you’re making just one monthly mortgage payment.
At Ameritrust, we offer two renovation loan options: the Fannie Mae HomeStyle® loan and the FHA 203(k) renovation mortgage. They’re both solid loans and the one you choose will depend on the property you are looking at and your credit and income profile. Let’s take a closer look.
FHA or HomeStyle®
Of the two, the FHA 203(k) offers more flexible lending guidelines. This means you can have a lower FICO score and higher debt-to-income ratio. And with a 3.5 percent down payment option, you don’t need a ton of money in the bank although you will be required to carry mortgage insurance for the life of the loan. FHA guidelines state that you must borrow at least $5,000 for repairs, your property must be a primary residence, and luxury improvements are not allowed.
The conventional HomeStyle® loan, on the other hand, lets you finance primary, vacation and rental properties. To qualify for this loan, you’ll also need a higher credit score and lower debt-to-income ratio. Private mortgage Insurance (PMI) is also lower, compared to the 203(k). The HomeStyle® requires a five percent down payment (10 percent for second homes). There are no restrictions on the types of repairs you can do, although they must add value and be permanently affixed to the real property. Landscaping, new appliances and swimming pools are all allowed.
As you can see, much of the decision on which renovation loan to choose rests on your end goals. If you're wanting to buy a house as an investment property and not live in it, you’ll need to go with the HomeStyle® loan. However, if you're looking to only put a 3.5% down payment on a home, then the FHA 203(k) is your best option.
Below is a simple guide that will help you compare both loans.
If you’re a first-time homebuyer and have a limited budget, or if you already own your home and are looking to add a bedroom or gut the kitchen, a renovation loan could make good sense. The key is to understand your options. At Ameritrust, we have a dedicated renovation team that can walk you through the process, one step at a time.* If you'd like to talk to someone about your options, we're here to help. Find a branch close to you here.
*Ranked as one of the top FHA 203(k) providers in 2018 by the Department of Housing & Urban Development.