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Published by Contour Mortgage on November 06 2019

203(k) Loans vs. Conventional Rehab Loans

Mortgage loans provide potential home buyers the funds to purchase a single- or multi-family home, condominium or townhouse. There are other types of loans, however, which additionally assist qualified applicants with upgrades and repairs. 

The Federal Housing Administration (FHA) guarantees one such type of rehab loan, known as the 203(k) loan. Other conventional rehab loans uninsured by the FHA are also available.

 

203(k) Loan

Only FHA-approved lenders can offer 203(k) loans—a major difference between these and conventional rehab loans. Generally, FHA loans are also more lenient regarding qualification requirements.

Part of the U.S. Department of Housing and Urban Development (HUD), the FHA states that a 203(k) loan “helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property.”

“Section 203(k) insured loans save borrowers time and money," it continues. "They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.” 

There are two versions, as outlined in our previous post titled "What Does A 203(k) Loan Do?"

The first is the Limited 203(k) loan, for non-structural work. Specifically, home buyers can potentially finance “up to $35,000 into their mortgage to repair, improve, or upgrade their home,” according to the FHA's website. 

The second is Streamline 203(k) loan, which is for structural work and therefore, tends to be more expensive. For example, repairing fire or flood damage would likely fall under a streamlined 203(k) loan.

 

Conventional Rehab Loans

While FHA 203(k) loans are a viable option for those interested in a rehab mortgage, there are also conventional loans to consider. 

For instance, the HomeStyle Renovation Mortgage was developed by the Federal National Mortgage Association (Fannie Mae). “The HomeStyle Renovation mortgage provides a convenient and flexible way for borrowers considering home improvements to make repairs and renovations with a first mortgage, rather than a second mortgage, home equity line of credit, or other more costly methods of financing,” the government-sponsored enterprise shares. 

HomeStyle Renovation loans offer three main benefits, which Fannie Mae breaks down on its official website:

Firstly, these provide “simple” financing and “conventional execution.” 

Secondly, they are “flexible,” in terms of the repairs or upgrades to the home. 

“HomeStyle renovation can be used on any renovation project and can help save deals that have repair contingencies, up to 97% LTV or 105% CLTV with eligible Community Seconds financing,” explains Fannie Mae.

 

Thirdly, they are affordable.

“Renovation costs may be approved up to the lesser of 75% of the purchase price plus renovation costs or the as-completed appraised value, and competitive rates that may be lower than a home equity line of credit (HELOC), personal loans, or credit cards,” it continues.

There are both pros and cons of rehab mortgage loans. It's therefore essential to consult with a mortgage professional to learn about the financing options available and most advantageous for you.

Contour Mortgage has been providing home mortgage loans for more than 25 years. Contact us today to find out how we can help you.

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