Fannie Mae HomeStyle® and FHA 203-K

Do you have a home in mind that's in a good location, has a nice layout, but is outdated or needs repairs? Are you wanting to do a remodel or add onto your current home?

These are the two most common situations where a renovation loan can come in handy.

A renovation loan gives homeowners access to funds needed to fix up their home. There are two different renovation loan programs that we offer: A Fannie Mae HomeStyle® Loan and A FHA 203-K Loan. We will go over the similarities and the differences of the two programs.

Similarities and Requirements:

A Contingency Reserve - a reserve account that is held in an escrow account during the renovation process. This is used in case of unknown health and safety costs - mold, termites, etc. We will go over this more below.

Renovation Loans typically have higher interest rates than a traditional purchase. This is due to the risk of the renovation process - fear of finding out that the home needs more work than originally thought. A commonality is to refinance into a better rate and out of mortgage insurance once the renovations are complete.

Both loan programs require a minimum 620 Credit Score - conditions do apply based off credit report.

Along with the standard closing costs there are draw fees, inspection fees and a HUD Consultant Fee that increase the costs of doing a renovation loan.

With the FNMA HomeStyle® Program and the FHA 203-K Standard you are able to finance up to 6 months of payments into the loan.

Contractor and Bid Requirements:

The renovation work being done must be completed by a licensed and insurance contractor. We will need proof of the license, proof of insurance, a completed W-9 Form and the bid agreement between the borrower and contractor. The bid must include the following:

• Borrower(s) name, property address, and signatures

• A detailed itemization breaking down material costs of each item and the labor costs of each item. Including the make and model and description of materials used.

• Any Permit Costs

• *A borrower cannot supply or pay for any materials that are on the bid*

• The biggest hold-up of a renovation loan is waiting on the contractor to provide the paper work needed. It's very important that you start this process as soon as you can. Due to this problem it does take 45 - 60 days to close a renovation loan.

A Fannie Mae HomeStyle® Renovation Loan-

A FNMA HomeStyle® Renovation Loan is a conventional mortgage loan that conforms to Fannie Mae Guidelines. It is the most commonly used renovation program by my past clients. It's popular since the home does not have to be up to FHA code and the underwriting guidelines are more lenient. It is the only program where you can finance multi-family purchases, 2nd home's, and investment purchase's. You can also finance a refinance through a renovation loan to upgrade your current home.

Since it's a Fannie Mae program, first time home buyers still have their down payment incentives, which start at as little as 3% down.

If you're a repeat buyer buying a place for your primary residence the minimum down payment is 5%. We are also able to go up to 95% loan to value for refinancing your current home.

If you're wanting to purchase a duplex down payments start at 15%. 3 to 4 unit properties require a 25% down payment.

A second home requires a 10% down payment, and an investment purchase is a 15% down payment.

If you want to upgrade an investment home through a cash out refinance we can go up to 75% Loan-To-Value.

Eligible Repairs:

There are no requirements to the improvements that can be financed, however all improvements must be fixed to the property. The cost of a renovation is based on the Contractors itemized bids for the work, plans and specifications.

You are able to complete the final work on a newly built home as long as the home is 90% complete.

You may use a renovation loan to construct various outdoor buildings and structures when allowed by local zoning regulations.

Consultants:

A consultant is required when the project costs are greater than $50,000, when structural repairs are needed, or at the discretion of the lender. A HUD consultant or project manager are acceptable consultants. They will visit the property to ensure code compliance. They will complete the Specification of Repairs or (SOR) report, which will determine if the contractor bid is up to code and will determine the Contingency Reserve requirement. Please see below section on HUD Consultants.

Contingency Reserves:

Ranges from 10 - 20% of the renovation costs. It is a reserve account that is held in case of unknown health and safety costs - mold, termites, etc. If the reserve is not used during the renovation process it will be applied to the principle balance of the mortgage. With a FNMA HomeStyle® Loan and 203-K Standard Loan you do have the option to use this reserve as a change order so that you can do more work to the property. If you choose this option it must be approved by the lender.

FHA 203-K Renovation Programs

There are two types of FHA 203-K Renovation Loans - The Limited Program and The Standard Program. I'll go over the similarities first and then break down the differences.

SIMILARITIES

• You’re only eligible for a 203-K Loan if you're buying the home as your primary residence. They do not offer investment or second home programs like the FNMA HomeStyle® Loan.

• Both programs allow for single family purchase, duplex purchase, town homes, condominiums and refinances.

• Foreclosure homes are acceptable.

• There are down payment programs for as little as 3.50% as long as your a first time home buyer - a 5% down payment is required if you've owned a home in the past 3 years. If you are looking to do a refinance to upgrade your current home you can go up to 97.75% loan to value.

• Luxury items such as BBQ Pits, Fireplaces, Hot Tubs, Murals, Swimming Pool Installation, Tennis Courts, Landscaping, or any improvements that does not become a permanent part of the real property are not eligible

• If the property is condemned or marked uninhabitable the property is not eligible for a 203-K Loan - you are able to do a FNMA HomeStyle® Loan though.

• Any and All Health and Safety Issues must be address and fixed.

DIFFERENCES

• 203-K Limited - This program is used for uncomplicated improvements or repairs. The maximum renovation amount is $35,000, which equals - contractor costs, the contingency reserve and any other costs included. Since the construction and repairs are uncomplicated a HUD Consultant is not required, which cuts down on the costs.

  You're able to use up to 3 licensed contractors - i.e. - plumber, roofer, and HVAC installer

  There are a maximum 2 draws permitted - 50% of the contractor bid is the maximum amount you can take for the 1st draw, which means you would take the other 50% for the 2nd and final draw.

  The work is required to start within 30 days of closing and must be completed within 90 days of closing

  • Eligible Repairs:

    Mechanical Items - Roof, Gutters, Down Spouts, HVAC, Plumbing/Electrical, Flooring. Minor remodel's without structural changes. Painting, Weatherization, Appliances, Mold remediation, minor Well/Septic repairs, etc.

  • Ineligible Repairs:

    New Construction, Relocation of Load-Bearing Walls - any structural repairs, Room Additions, Installation of Well/Septic. You are unable to do the Demo Work.

• A 203-K Standard Loan - This program is used for a more heavy load of construction - replacing or additions to a home. There is a not a maximum repair cost amount, but there is a $5,000 minimum. The work must start within 30 days of closing and must be complete within 180 days of closing. You are able to finance up to 6 months of your mortgage payment into the loan if the HUD Consultant deems the home uninhabitable.

  The contractor is allowed to take up to 5 draws - No funds are disbursed to the contractor or borrower at closing, which means that the contractor will typically front the money until the 1st draw is can be released. A HUD Consultant will determine the timeline and is required on all Standard Loans.

  • The HUD Consultant's Role
    is basically to manage the project. They will go out to the property before the loan closing to inspect the project specifications and code requirements. They will then consult with the contractor and put together a work write-up report or the specification of repairs (SOR) Report. This report will describe the quantity and qualify of materials required. It will list the costs of material, labor, overhead, and profit of the project. It will include adequacy of existing structure, plumbing, heating, electrical, and roofing. They will determine the contingency reserve requirement, which will vary from 10 - 20% of the renovation costs. They will set the draw schedule and inspect the property to approve disbursements before each draw. They are a part of the process to protect the borrower from any uncertainties with the contractor and to make sure the home is up to lender standards. The Consultant does cost a few which depends on the costs of the renovation:

    >$100,000 = $1,000

    $75,001 - $100,000 = $900

    $50,001 - $75,000 = $800

    $30,001 - $50,000 = $700

    $15,001 - $30,000 = $600

  • Eligible Repairs for a 203-K Standard -

    Major Structural alterations and additions - Remodeling of Rooms, including Kitchens and Bathrooms, Relocation of Load Bearing Walls, Construction or Rehab of detached garage, Major Landscaping and site improvements, Repair of Swimming Pool, Converting Multi Unit to a single unit, or vice versa.

    Basement finishing, or waterproofing.

    Well/Septic Work

    Retrofitting for handicapped access

Post Closing

Once you close on the home you will receive and introduction email from your mortgage investor/company.

Depending on the type of loan you may be getting an initial draw:

• With a FNMA HomeStyle® Loan and a 203-K Limited Loan you are able to receive up to 50% of the material costs from the contractor bid at closing.

• With a 203-K Standard Loan you will not get a disbursement at closing for material and labor. The only disbursement you will receive is for permits, architectural/engineering fees and HUD Consultant Fees. This means that your contractor will need to front the money for the start of the project. Your contractor may need to take a loan out for these costs, which the contractors may charge you the interest for. If your contractor is not liquid you may want to consider switching to a FNMA HomeStyle® Loan.

Have Questions?

Read our other blog posts or reach out to us directly.

Benson Ringle
Loan Officer NMLS #1516626
GA Lic. # 1516626
(218) 507-0429
Benson.Ringle@supremelending.com