Fannie Mae HomePath provided a great way to buy and renovate a bank owned property. Unfortunately Homepath is no longer going to be available after October 6th, 2014. The remaining home renovation mortgage products available are HomeStyle from Fannie Mae and the FHA 203k. There are some pretty big differences in these two products.
Let’s begin a comparison with the FHA 203k Rehab Loan. The first thing to keep in mind is FHA loans are for owner occupied properties. The biggest benefit is qualifying for an FHA loan can be easier than a conventional mortgage (Fannie Mae). The credit score requirements are lower and they allow for a higher DTI (debt to income ratio). The higher DTI means you might qualify for more house with the FHA versus a conventional loan. The down payment is also 3.5% as opposed to 5% with a conventional product. There are two types of FHA 203k loans. A streamlined version for less complicated renovations and a full program when structural repairs are part of the plan. There are a couple details, however, with the FHA 203k that might not fit everyone’s needs. FHA loan limits apply to this product and may be less than your budget. I will include a link at the bottom of the article for you to find out exactly what the limit is in your area. Don’t forget you must have a certificate of occupancy to use an FHA 203k Rehab loan.There also is the issue of mortgage insurance. Although both products require mortgage insurance (unless you are going conventional with 20% or more down) FHA’s mortgage insurance can’t be eliminated as the equity in your house increases. This can mean you would have to refinance your mortgage to get rid of the extra expense of mortgage insurance. Refinancing can be costly so make sure you understand the rules before you sign.
The HomeStyle conventional rehab loan can be a better fit for many home shoppers. In Brevard county this loan can go as high as $417,000. FHA has a local maximum limit of $271,050. The HomeStyle loan also allows for landscaping and luxury items like swimming pools, outdoor kitchens and spas. There are some limitations that you need to be aware of with this conventional mortgage. You will need a higher credit score than you would with FHA with a FICO of 660 being the low end of qualifying. Your income versus your expenses (DTI) is also a bit more difficult to qualify for with the HomeStyle loan. When it comes to mortgage insurance you have a couple big advantages however. Your MI (mortgage insurance) can be eliminated as the equity in your house increases allowing for a drop in payment without the expense of refinancing. You also don’t have to pay any up front mortgage insurance that is normally added to your loan amount.
A quick review of these two mortgage options shows they are designed for different home ownership goals. If you want to find a home that can be purchased at a lower price due to the need for repairs, and falls under a mortgage amount of $271,050, the FHA 203k Rehab is probably the right product for you. A home that is a few luxury additions away from being perfect would benefit from a HomeStyle mortgage plan. These are greatly simplified scenarios. Please give me a call and we can discuss your options and qualifying in greater detail!
The Mortgage Firm
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