Some people enjoy taking on big projects and aren’t fazed by a home in need of significant repairs and updates. Such home buyers would benefit from knowing the various rehab loans available to help them purchase their first home and pay for some of the renovations.
There are several rehab loans first-time home buyers should be aware of when considering their mortgage options, including FHA 203(k) loans, HomeStyle® Renovation Mortgages, and Freddie Mac Mortgages.
FHA 203(k) Loan
203(k) loans are guaranteed by the Federal Housing Administration. There are two types: streamlined and standard.
Regardless of which a borrower is interested in, he or she can start the process by talking to local contractors and getting bids for the necessary work on the home he or she would like to purchase. It may be helpful to discuss potential contractors to hire with a real estate agent beforehand, as he or she will likely know of a few in the area.
Remember, when looking to learn more about the mortgage application or home-buying process, it's always advantageous to speak with experts in the industry—i.e., a trusted mortgage lender and/or real estate agent. They can not only provide invaluable advice, but also recommend other experts who can be of assistance, ensuring borrowers are as informed as possible when purchasing their first home.
Getting a bid from a contractor early on can help show a lender how much the renovation will cost. Note that repairs need to begin within 30 days of closing, and they must be finished within six months. If these end up costing less than expected, the remaining money will be put toward the principal balance of the loan.
HomeStyle® Renovation Mortgage
The Federal National Mortgage Association, or Fannie Mae, developed the HomeStyle Renovation Mortgage. It gives "borrowers the option to renovate and rehab a new or existing home by including financing in their conventional purchase or refinance home loan," it states on its website.
Such renovations could including updating the bathroom or replacing the roof. In fact, this type of loan "can be used on any renovation project and can help save deals that have repair contingencies, up to 97% LTC [loan-to-value] or 105% CLTV [combined loan-to-value] with eligible Community Seconds™ financing," it continues.
Plus, borrowers have the option to utilize the HomeStyle Renovation in combination with other Fannie Mae financing options, such as HomeStyle® Energy and HomeReady®.
Freddie Mac Mortgages
The Federal Home Loan Mortgage Corporation, or Freddie Mac, offers another type of renovation loan for people "seeking to repair, restore, rehabilitate or renovate an existing site-built home" or "who want to make additions to their existing home," explains its website. Similar to the HomeStyle Renovation Mortgage, this loan can be used in combination with other Freddie Mac products, with additional benefits for borrowers.
Various property types qualify, specifically single-family and multi-family (up to four units) homes. These aren't required to be a borrower's primary residence, either. Besides borrowers looking to obtain a loan to help pay for their first home, others may also find Freddie Mac Mortgages appealing, since funds can also be used to purchase second homes and investment properties.
Originally published on August 31, 2017. Updated on January 18, 2019.