Editor’s Note: This blog was originally published in August 2017 and has been revised to reflect industry updates.
With narrow real estate inventories, and more buyers than sellers, many potential homeowners—especially first-timers—are excited about a fixer-upper or renovation project. Before embarking on your home search, however, it's imperative to first understand bundled purchase and renovation mortgages for these property types.
There are several rehab loans first-time home buyers can take advantage of, including Federal Housing Administration (FHA) 203(k) loans, and Fannie Mae HomeStyle Renovation and Freddie Mac Renovation mortgages.
What Is a Rehab Mortgage?
Available as government-backed or conventional options, rehab mortgages are intended for purchasing fixer-uppers requiring renovations and improvements. The most common include FHA 203(k) loans boasting lower credit scores, down payments, and debt-to-income (DTI) ratios.
The Federal National Mortgage Association, also known as Fannie Mae, offers its HomeStyle Renovation Mortgage, and the CHOICERenovation loan through Freddie Mac.
Whether choosing a loan offered through the FHA, Fannie Mae or Freddie Mac, these can only be acquired through an approved lender, such as Contour Mortgage.
FHA 203(k) Loans
FHA 203(k) loans are offered as two types: Limited and Standard. Also known as Streamline, the former covers up to $35,000 for repairs, such as kitchen and bathroom renovations, tile, plumbing and electrical work. The latter is for more costly projects involving fire or flood damage, teardowns, and code violations.
Regardless of loan type, borrowers should immediately begin researching and obtaining contractor work bids. It’s also helpful to discuss this with your real estate agent, lender, and other trusted sources. They can provide invaluable advice and recommend moving and relocation companies, repair personnel, and other service providers.
An early contractor bid provides a project cost estimate and also demonstrates intent to purchase. Repairs must begin within 30 days of closing and finish within six months. If costs are less than expected, remaining funds will be added to the loan principal balance.
Unlike conventional mortgages, FHA loans don’t require private mortgage insurance (PMI). However, borrowers will still be responsible for upfront mortgage insurance premiums (UFMIPs) and annuals fees. Regardless of the down payment amount, UFMIP is 1.75 percent of the loan, while annual fees are 0.35 of outstanding principal.
Borrowers with previous foreclosures and bankruptcies could also qualify per designated waiting periods.
Fannie Mae HomeStyle Renovation Mortgage
The Federal National Mortgage Association, or Fannie Mae, developed the HomeStyle Renovation Mortgage for borrowers seeking conventional financing to renovate and repair a new or existing home.
Such renovations could include bathroom and kitchen updates, or roof replacements. This loan type can also cover up to 97 percent loan-to-value (LTV) or 105 percent combined loan-to-value (CLTV) per Community Seconds Financing. Borrowers can also utilize the HomeStyle Renovation with other Fannie Mae financing options, such as HomeStyle Energy and HomeReady.
Freddie Mac CHOICERenovation Loan
The Federal Home Loan Mortgage Corporation, or Freddie Mac, offers its CHOICERenovation loan for borrowers renovating, repairing, or adding to an existing home. Similar to the HomeStyle Renovation Mortgage, this loan can be bundled with other Freddie Mac products.
Designed specifically for single-family homes and multi-family properties up to four units, these aren't required to be a borrower's primary residence. Certain limitations might apply for these 15- or 30-year loans.
For additional down payment credits, borrowers can complete repairs during the contract period prior to closing. Additional appraisals to ensure renovations meet post-construction values could also be included.
Ensuring the best loan for any renovation project is key to a smooth process. When commencing your home search, it’s best to have recommended professionals on your team, including a reputable mortgage lender.