February 25th, 2018 8:04 AM by Jackie A. Graves, President
it’s a need, like a leaky roof, or a want (goodbye shag carpeting!) there are
renovation loans that can help pay for your home renovations.
do you decide which type of mortgage is right for your fixer-upper? Here’s
what to know about each option.
popular home renovation loans:
Home renovation loan
Minimum down payment /
Fannie Mae HomeStyle loan
5% down payment
FHA 203(k) loan
3.5% down payment
Home equity loan / HELOC
home renovation loans
Mae’s HomeStyle Loan
of best-known loans for home improvements, Fannie Mae’s HomeStyle Renovation loan allows borrowers to
either purchase a place that needs some repairs or refinance their home with a
new mortgage to fund improvements.
HomeStyle loan is available from any Fannie Mae-approved lender, but there are
minimum requirements to qualify. For a primary residence, you have to have a
minimum credit score of 620. You can check your credit score for
free with myBankrate to see if you fit this criteria. You’ll
also have to put down at least 5 percent of the purchase price of the home.
you can get approved, you’ll also need to have a certified contractor prepare
and submit a cost estimate and detail of the work to be done.
advantage of a HomeStyle loan over other types is that it’s just one loan,
instead of taking out a loan for the mortgage and then another loan for home
repairs. This can mean less paperwork and only one set of closing costs.
in mind that the money for the repairs or improvements goes into a separate
escrow account that’s used to pay the contractor directly. You don’t have
access to these funds like you would with some other types of loans, like a home
equity loan or a cash-out refinance.
nuance with the HomeStyle loan is that there’s a little less freedom for the
customer because the funds are held in an escrow account,” says Eric Wilson,
director of operations at Better Mortgage.
Federal Housing Administration offers a type of home renovation loan known as a
203(k.) With this type of loan, there’s typically a lower minimum credit score
requirement than with a HomeStyle loan, and also a lower minimum down payment
of 3.5 percent.
203(k) loans can be broken down into two types: limited (formerly called
streamline) and standard.
limited FHA 203(k) loan is designed for cosmetic improvements or upgrades, and
is capped at $35,000. A standard FHA 203(k) loan can be used for more extensive
and expensive remodeling but also requires hiring a qualified 203(k) consultant
to oversee every step of the work, from plans to the finished product.
built-in security with having that consultant. Most people doing a major home
improvement project typically hire a contractor on their own, according to
Stuart Blend, regional sales manager for Planet Home Lending. But with an FHA
loan, that 203(k) consultant acts as a project manager, assessing the proposed
costs, plans and the work being done every step of the way.
you take out that loan, that money rests with the lender. We’re holding those
funds in escrow, and we’re making sure everything is done the way it’s supposed
to be done,” he says.
home renovation loans
way to finance your home renovation is by taking out a home equity loan,
sometimes referred to as a second mortgage. They’re a one-time loan, so they
aren’t subject to fluctuating interest rates, and monthly payments remain the
same throughout the life of the loan.
similar loan is the home equity line of credit, known as a HELOC. It has a
revolving balance and might be best for someone who has several large payments
due over time, like with a big home improvement project.
either option, you’re pledging your home as collateral, meaning if you don’t make the payments on
your loan, the lender could end up owning your house. Alternatively, you can
take out an unsecured personal loan to
avoid owing collateral.
HomeStyle and FHA 203(k) loans have some advantages over home equity loans.
loan amount with either of these is based on the completed value and not the
present value. A home equity loan is based on the current value,” says Gregg
Harris, president of LenderCity Home Loans, a division of BBMC/Bridgeview Bank
A cash-out mortgage refinance
is another private home remodel loan. Cash-out refinancing allows homeowners to
take out another mortgage. The second mortgage will be higher than the first,
and the homeowner will recieve the difference in cash.
home equity loans/HELOCs, cash-out mortgages require homeowners to
use their home as collateral. But if you’ve got a considerable amount of equity
in your home, you might be able to find lower interest rates. Combine lower
interest rates with additional value derived from home renovations,
and you might save more in the longer run.
need at least 20% available equity in your home to qualify for cash-out
refinancing. The total loan amount is limited to available equity in your home.
Credit score requirements vary per loan amount and value of your home, but
generally start at 640
do you choose?
really comes down to credit and eligibility,” Harris says.
FHA 203(k) might be best for someone with so-so credit, as most Fannie Mae
HomeStyle lenders require a minimum credit score of 620. But
borrowers can get a mortgage with a down payment as little as 3.5 percent.
HomeStyle loans require 5 percent.
how much you want to borrow and what it is you want to change.
sure you’re working with a lender that is well versed with the details of the
program,” says Laurie Souza, the business development manager in the specialty
and renovation lending department at Mortgage Network Inc.
can be complex to calculate the best home renovation mortgage for your needs,
so a lender who has deep knowledge of the programs can help you find the right
fit, Souza says.
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