The FHA also offers a renovation loan similar to the HomeStyle loan. The FHA 203k loan has similar qualification factors as the standard FHA loan. It is a good alternative for people who would not qualify for conventional financing.
The FHA 203k loan requires lower credit scores and has more flexible underwriting guidelines. They still require stable employment, low debt ratios, and good credit, but their requirements are not as strict as Fannie Mae’s guidelines. For example, a borrower with a 620 credit score and 37 percent debt ratio could possibly be better off with the FHA 203k loan rather than the Fannie Mae loan. It is best to consult with your renovation loan specialist to find out which loan is best for you.
Generally, borrowers with a larger down payment than 5% and higher credit scores may do better with the Fannie Mae loan simply because it may be a potentially less expensive option. FHA 203k loans, just like FHA loans charge mortgage insurance for the life of the loan. However, the FHA loan does offer the same benefits the Fannie Mae loan offers. If you and your mortgage loan originator decide that the FHA loan is a better solution for you, you can always refinance in the future when you owe less than 80% and remove the mortgage insurance. Please keep in mind that the best way to determine which product is the best for you is to take the time to speak to a loan specialist who knows these products inside and out. They will be able to best determine the best solution for your renovation.
Another difference with the FHA 203k loan versus the HomeStyle loan is the types offered. The FHA has two options:
- FHA Limited 203k (formerly known as Streamline) – This is a more slimmed down version of the renovation loan. Borrowers that have less than $35,000 in renovations done on the home can go through a streamlined process. With this program, you do not need a loan consultant overseeing the entire process, however, having one is still recommended. The lender handles the disbursements and necessary inspections, which usually only occur once the work is complete.
- FHA 203k – The full 203k is necessary when you borrow more than $35,000 for renovations or you are doing any work that is structural in nature. This loan is also necessary if you need an architect to create blueprints for the renovations. This loan requires the use of a loan consultant. This third party oversees the entire 203k process. The consultant can negotiate with contractors, help you choose a contractor, weigh in on your renovation decisions, and conduct the inspections before fund disbursement.
Aside from the qualifying differences and the slight difference in the Limited 203k, the FHA 203k works much the same way as the HomeStyle loan. The lender must approve any contractors you choose and must also approve the renovations. The lender holds the money in an escrow account and disburses it to the contractor based on the predetermined disbursement schedule agreed upon before closing.
Both loans provide the same result – it just depends on the type of loan you qualify to receive.