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Recently I was asked to explain differences between the HomeStyle rehab loan and the FHA 203k rehab loan. Both types of loans are based on the final, finished or “after completed” value of the property with all renovations included rather than just the purchase price or present value. There can be advantages to both in different situations but here I will give the highlights of the Fannie Mae HomeStyle renovation mortgage in the points below. I will also refer to 203K to illustrate major differences.

  • HomeStyle can be used to purchase or refinance a 1 to 4 unit property with the limitation that 2 to 4 unit properties must have the buyer/owner living in the property. The funds to purchase and renovate will be in one loan. If an owner wants to use this loan to remodel their existing home any current first lien mortgage will be refinanced with a HomeStyle mortgage, adding in extra funds to do the remodel. Second mortgages can also be rolled into the HomeStyle mortgage provided the second mortgage was done with the original purchase and not added or changed later. Required HomeStyle down payment will vary from 5% to 25% depending on property type and buyer qualifications. With 203K if there is an existing second mortgage FHA will allow the second to be rolled into the new first lien 203K loan without limitation on when the second mortgage was done.
  • HomeStyle has a great advantage in that it is a rehab loan for those wishing to buy a 1 unit property to rent out but never live there. Investors can purchase a 1 unit property with HomeStyle (single family home, condo or townhouse) adding in funds to do a renovation in the same purchase loan. This allows an investor to lease out the home to tenants and not occupy it, or perhaps sell the home after renovation. Another option for investors is to take a 2 or 3 or 4 unit property and downsize it to a single family home with HomeStyle. For an investor the required down payment is 20% of the total purchase price plus the rehab funds. An investor may refinance a 1 unit property to 75% of “as completed” value using Homestyle to secure funds to renovate. FHA 203k does not allow buyers to purchase property to not occupy and rent out under any circumstances.
  • Those purchasing or remodeling a vacation home or second home can use HomeStyle to buy the property with a minimum 10% down payment adding in funds to do the remodel. This is for 1 unit type properties only (single family home, condo, townhouse) and not multi-units. FHA 203k does not permit loans for second homes or vacation homes.
  • Condominium purchases or refinances with renovations are more easily financed with HomeStyle. Fannie Mae normal condo warrantable guidelines will apply. The size of the condominium project is not limited as it is with 203K. With 203K the rule is the individual condo structure may not contain more than 4 units. That rule effectively excludes larger condo projects from 203k unless built in separate physical structures of no more than 4 units per building. Plus the entire project would have to be fully FHA approved under current 2015 FHA condominium rules. With all this in mind HomeStyle presents an attractive renovation loan option under most circumstances for condominiums.
  • An advantage of HomeStyle over 203K is in the required 10% Contingency Reserve. With HomeStyle the reserve is set at 10% of the construction budget. This reserve must be established to cover unforeseen repairs or deficiencies that are discovered later during renovation. This reserve may be added to the loan or paid in cash by the buyer. It is always 10% of the repair budget with HomeStyle. With 203k this can rise to 15% or even 20% under certain conditions.
  • Homestyle does allow for mortgage payment escrow accounts. During the period of construction while the home cannot be safely occupied funds maybe added into the loan to pay up to 6 months of principal, interest, tax and insurance payments. The 203K is the same in this regard.
  • HomeStyle does not have the same limitations on allowable improvements that FHA 203K has for things such as fencing, landscaping, installation of a swimming pool, hot tub, whirlpool bath, tennis court, basketball court, etc. HomeStyle is also somewhat less particular on general conditions such as peeling paint, stair railings and so forth.

Generally speaking HomeStyle may be a good option for all the above reasons for buyers purchasing a home needing updates or major repairs.

I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!