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Published by Contour Mortgage on August 23 2021

FHA 203(k) Loans vs. Conventional Rehab Loans

Editor’s Note: This blog post was originally published in November 2019 and has been revised to reflect industry updates.

With real estate prices and inventory at a competitive pace, potential homeowners are facing obstacles such as bidding wars, limited availability, budget concerns, and other factors. Rather than renting, living with family members, or residing in an unsuitable property, many are purchasing rehab and fixer-upper homes. 

Currently, there are two types of government-backed loans available for rehab or fixer-upper projects: Federal Housing Administration (FHA) 203(k) Limited and Standard. 

Conventional options are also a suitable choice. The Federal National Mortgage Association, also known as Fannie Mae, offers its HomeStyle Renovation Mortgage. Another is the CHOICERenovation loan, through Freddie Mac.

Similar to any loan product, there are several factors, advantages, and disadvantages when deciding which is best. These include income requirements, qualifications, credit scores, mortgage rates, and more. 

When deciding which is best, it’s important to work with a reputable and approved lender, such as Contour Mortgage, for guidance.

Below we’ll examine the qualifications, requirements, advantages, and differences between FHA 203(k) loans and conventional rehab mortgages.


FHA 203(k) Loan

Offered by the U.S. Department of Housing and Urban Development (HUD), this loan is backed and insured by the FHA. While only approved lenders, such as Contour Mortgage, can offer these, they also have slightly more lenient terms than conventional mortgages. 

Benefits can include a significant return on investment (ROI) due to value-added improvements, and a 3.5-percent down payment.

With the intent to help borrowers obtain a fixed- or adjustable-rate mortgage, this loan comprises the property’s purchase and repairs. 

As aforementioned, this loan offers two options, as outlined below: 

Limited 203(k)

Designated mainly for non-structural work, the FHA permits consumers to borrow up to $35,000 into their mortgage for repairs, improvements and upgrades. This loan is appropriate for cosmetic upgrades, such as flooring, appliances, plumbing and electrical work, as well as kitchen and bathroom renovations. Depending on your location, total costs are capped at a specific amount.

Standard 203(k)

Used for structural work geared toward repairing fire or flood damage due to hurricanes and other natural disasters, this loan’s higher limits are designed for more costly rehabilitation projects. 


Conventional Rehab Loans

While FHA 203(k) loans are a viable option for those interested in a rehab mortgage, there are also conventional options to consider. As aforementioned, Fannie Mae offers its HomeStyle Renovation Mortgage, while Freddie Mac has the CHOICERenovation loan.

Fannie Mae Homestyle 

Offered as both a fixed- and adjustable-rate solution, this flexible loan assists borrowers with improvements and upgrades via a primary mortgage, rather than other costly methods. It can also be bundled with other Fannie Mae products. 

According to the HomeStyle Renovation Mortgages: Loan and Borrower Eligibility requirements: “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.”

Freddie Mac CHOICERenovation 

Unlike FHA 203(k) loans, CHOICERenovation can be utilized toward multi-unit dwellings, as well as second homes, or investment properties. It also carries a 3.5-percent down payment, and lower credit scores and debt-to-income ratios (DTI). Available as a 15- or 30-year term, certain limitations may apply depending on your location. 


The Takeaway

There are both pros and cons of rehab mortgage loans. It's therefore essential to consult with a reputable mortgage lender for more information on qualifications, requirements, and other factors.

Contour Mortgage provides lending services throughout the United States. Contact us to learn more about our various renovation and rehab property financing options.

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