Imagine transforming a run-down property into your dream home or a profitable rental property. With the right renovation loan, you can finance this transformation. The FHA 203k and Fannie Mae HomeStyle loans are two popular choices, each with distinct features. It’s important to know their differences so you can choose the right mortgage for your situation. We will explore the answer in this article. 

What is a Homestyle Renovation Loan? 

Backed by Fannie Mae, a homestyle loan allows you to invest in a variety of renovation projects. You can finance both the house and the repairs with just a 5% down payment, with some limitations. 

A homestyle renovation loan will finance a maximum of 75% of the ARV  for rehab work. Let’s say you buy a house in Chicago worth $200k but you expect to spend $80k on home repairs. The after-repair value of your property is $350k. A homestyle loan can get you: 

• 75% of ARV: 
• 75% of $350,000: 
• $262,500

Your total expense is $280k and you can borrow $262,500. That is the beauty of investing in a distressed property with a homestyle loan. Renovating the house will create instant equity for you. You can sell your house for a profit or make it a part of your rental portfolio. 

How does a homestyle renovation loan work? 

Fannie Mae Homestyle can be used to renovate a second home, a vacation property, a condo, a manufactured home, or a multi-family property with a maximum of 4 units. 

Acquiring this loan is similar to acquiring an FHA mortgage, with a few differences. You need a credit score of 620 points and a minimum 5% down payment for primary homes. For second homes and investment properties, you need a 10% and 15% down payment, respectively. 

You will need to pay a mortgage insurance premium (MIP), which is applied monthly to your mortgage payments. 

QB Quick Tip: Do you know a “mortgage insurance premium” is different from “premium mortgage insurance”? 

It’s easy to confuse “MIP” with "PMI.” Don’t worry. We will explain it to you. For FHA loans, you pay a mortgage insurance premium when your down payment is less than 20%. For FHA 203k, you pay an upfront MIP of 1.75% but there is no upfront payment for the homestyle loan. How long do you have to pay the MIP? It depends on your down payment. Discuss with your lender and see when you can have that fee waived. 

For conventional loans, you pay “private mortgage insurance” when your down payment is less than 20%. You can have it waived once you have 20% equity in the house, pay off 78% of the original home value or at the midpoint of the amortization schedule. For a 15 year mortgage, you can have PMI waived after 7.5 years or after showing proof of 20% equity. 

What are the Loan Approval Steps? 

Getting approved for a Fannie Mae Homestyle loan can be tedious. You can avoid delays and hassles by doing research beforehand. You need to find a contractor once you apply for the loan and get the house under contract. Get bids for the work required and finalize the loan after submitting detailed bids to the lender. 

Key Points of Homestyle Renovation Loan

• You cannot demolish the house. 
• You don’t have to pay an upfront mortgage insurance premium. There is a monthly MPI fee of  0.4%  which can be waived when you have a 20% equity stake in the house. 
• There is no income limit but a borrowing limit exists, similar to all conforming mortgages. Currently, you can borrow $498,257 for a single-family home or $958,350 for 4-units in Cook county, Illinois. 
• The renovation process must be completed within 1 year of the loan origination. 
• You cannot pay yourself for the renovation work. All the payments will go towards a licensed and insured general contractor. 
• Your general contractor can request a 50% material cost upfront. That helps them start your project quickly. 
• HUD consultants will oversee the repairs, inspections, and payments.
  
  

What is a FHA 203k Loan? 

FHA 203k is a popular alternative to a homestyle mortgage. Like mentioned earlier, you can renovate a primary residence using FHA 203k. You need to live in the house for one year so it qualifies as your primary residence. Like other FHA mortgages, you can secure 203k with a 3.5% down payment and a 580 credit score. FHA 203k comes in two flavors: the standard version and the limited version. You can use the standard version if the repair cost exceeds $35,000. 

A FHA 203k will finance the lesser of these two values: 

• Loan limit in your area
• Or 110% of the after-repair-value

Let’s say the after-repair value of your house is $430k and the borrowing limit for your home is $498,257. 

• Calculate 110% of the ARV ($430k): $473k
• Since $473k is less than $498,257, your maximum loan value will be $473,000. 
  
  

Key Points of FHA 203k Loan

• You can demolish the house and reconstruct from scratch as long as you build on the same foundation. 
• There is an upfront mortgage insurance premium (1.75%) and a monthly ongoing fee of 0.80%. 
• There is no income limit but a borrowing limit exists, which is $498,257 for a single-family home and $958,350 for 4-units in Cook County, Illinois. . 
• A HUD consultant will monitor the project if renovation cost is over $35,000. 
• Generally,  the renovation work must be completed within 6 months of the loan origination. 
• You cannot do the renovation work yourself. A licensed general contractor will complete the rehab work. 
  
  

How Should I Choose Between FHA 203k and Homestyle Loan? 

Schedule a free consultation and we can go over your options for renovating a Chicago property. The rule of thumb is to choose 203k if you want to renovate a primary residence or reconstruct the house from scratch. You have 6 months to rehab the property. FHA 203k is a great option for multifamily properties, as you can live in one unit and rent out the other ones, aka house hack. 

A homestyle loan is a preferred option for renovating a second home because you don’t have to live in the house. 

The Role of a General Contractor in Your Project's Success

FHA 203k and homestyle loans require the involvement of an experienced general contractor. You need a licensed contractor with a full-time insured business. Make sure that your general contractor understands the underwriting process for this loan. A good write-up is required for loan approval. Your general contractor will need to provide an itemized list outlining the cost of materials and labor. 

Understand the Process

Utilizing 203k or homestyle loans requires an understanding of the process. Familiarize yourself with key steps so you can make it a hassle-free journey. Basically, the process goes like this: 

• Apply for the loan
• Get the house under contract
• Find a reliable general contractor & HUD Consultant
• Get bids for the work requested
• Finalize loan processing
• Close the loan
• Complete the repairs

The key is to find a general contractor who is fast, responsive, and knows how the program works. With the help of an experienced general contractor, you can submit detailed bids quickly. You will get quality renovation work, making the entire process go smoothly. 

For a successful renovation project, you need two things. First, find a property that’s not in the best shape but whose location is great. With home prices appreciating, you will build home equity quickly. Second, partner with an experienced general contractor in Chicago. The loan approval depends on the quality of the bid and the responsiveness of your contractor. 

Quality Builders: Your Trusted General Contractor for a Seamless Renovation Experience

At Quality Builders, we provide a stress-free rehab experience. Are you renovating a house in Chicago? We will give you a detailed project analysis, and a brief proposal. You will get real-time schedule and budget updates for your project. And we will complete the project on your timeline. 

Our team will help you with the renovation project so you can get your loan approved and start earning profits from your investments. 

Schedule your free consultation with our expert team at Quality Builders.