203K and HomeStyle Renovation Loans are the perfect loan if you want to purchase and renovate with minimal out of pocket expense. Renovation Loans, through federally-backed funds, make it possible to finance a home in California and repair / upgrade it at the same time.
BEFORE - Can you imagine seeing this and wanting to call it "Home"
AFTER - With a little vision and help you could turn that teardown into a "Home"
There are several Renovation Loans available to meet a wide array of financing goals and I will go through the differences between each Renovation Loan and share advantages of using one over the other but they all share the same basic concept.
A Renovation Loan lets you purchase or refinance and rehabilitate a property with one loan, one approval process and one payment. The projected rehabilitation costs are held in an escrow account established by the Lender and disbursed as work is completed and inspected. The loan amount / down payment is based on the projected market value of the property when all repairs are completed or sales price plus renovation costs, whichever is lower. On all Renovation Loans the renovation budget will include labor, material, permit costs, inspection fees, up to 6 months of financed mortgage payments, and a contingency reserve fund of at least 10% to cover unforeseen repairs during the renovation phase.
Some General benefits across the board that is applicable with all renovation loan products:
- You can purchase a home that does not require repairs and finance the cost of “modernization” or cosmetic repairs
- The loan enables you to purchase distressed properties that require repairs including Short Sales and Foreclosure properties that are sold in As-Is condition to cash only buyers
- Properties in “below-average” condition can be upgraded through repairs and maintenance
- Where zoning allows, a Renovation Loan can be used to convert a single family dwelling to 2-4 units and vice versa.
- Up to six months of PITI (principal, interest, tax and insurance) payments can be financed to assist those who would otherwise be required to make double-housing payments.
- A Renovation Loan can be used for complete reconstruction of a home on its original foundation
- Increase square footage by building an addition, building a second floor or finishing a basement or attic space
- Make Improvements for accessibility for persons with disabilities
FHA 203(k) Loans – Purchase and Refinance
A “203K” loan has become the slang term for all renovation loans however it is actually the name of the FHA Renovation Loan. An FHA 203K is available for Owner-Occupied primary residence transactions only and has looser credit requirements allowing credit scores down to 640 (exceptions can be made down to 620 on a case by case basis) and allowing expanded debt to income ratios up to 55% with as little as 3.5% down payment on a purchase and little to no out of pocket expenses upfront on a 203K Renovation Refinance. The 203K loan amount is based on the Lessor of the Total Acquisition Cost or 110% of the Projected after improved value.
The FHA 203K Renovation Loan can be completed under either a Limited K Loan or a Consultant K Loan. Choosing which loan suits you best will depend on the amount and type of improvements the property needs.
Limited 203K: The limited K program is for homes needing limited repairs and requiring relatively little expertise to manage. This is primarily designed for a “streamlined” project where the home can be occupied immediately after closing, and the contractor will receive one draw in the amount of 50% of the total contract and the final payment at completion. It has no minimum repair costs but has a cap of $35,000 (which leaves the labor and material budget at about $31,000). Examples of Limited 203K repairs:
- Eliminating health and safety hazards that would violate HUD’s MPR;
- Repairing or replacing wells and/or septic systems;
- Connecting to public water and sewage systems;
- Repairing/replacing plumbing, heating, AC and electrical systems;
- Making changes for improved functions and modernization;
- Eliminating obsolescence;
- Repairing or installing new roofing, provided the structural integrity of the Structure will not be impacted by the work being performed; siding; gutters; and downspouts;
- Making energy conservation improvements;
- Creating accessibility for persons with disabilities;
- Installing or repairing fences, walkways, and driveways;
- Installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven and washer/dryer;
- Repairing or removing an in-ground swimming pool;
- Installing smoke detectors;
- Installing, replacing or repairing exterior decks, patios, and porches; and
- Covering lead-based paint stabilization costs if the Structure was built before 1978
Consultant K: The Consultant K is typically used for homes that need repairs in excess of $35,000 or require structural repairs; however there must be at least $5,000 worth of repairs. The Consultant K program allows for more extensive work to be done and has little restrictions on what can be done with the exception of luxury items like pools, spas, gazebos, tennis courts, etc…Examples of Consultant K repairs:
- Converting a one-family Structure to a two-, three- or four-family Structure;
- Decreasing an existing multi-unit Structure to a one- to four-family Structure;
- Reconstructing a Structure that has been or will be demolished, provided the complete existing foundation system is not affected and will still be used;
- Repairing, reconstructing or elevating an existing foundation where the Structure will not be demolished;
- Purchasing an existing Structure on another site, moving it onto a new foundation and repairing/renovating it;
- Making structural alterations such as the repair or replacement of structural damage, additions to the Structure, and finished attics and/or basements;
- Rehabilitating, improving or constructing a garage;
- Eliminating health and safety hazards that would violate HUD’s Minimum Property Requirements (MPR);
- Installing or repairing wells and/or septic systems;
- Connecting to public water and sewage systems;
- Repairing/replacing plumbing, heating, AC and electrical systems;
- Making changes for improved functions and modernization;
- Making changes for aesthetic appeal;
- Repairing or adding roofing, gutters and downspouts;
- Making energy conservation improvements;
- Creating accessibility for persons with disabilities;
- Installing or repairing fences, walkways, and driveways;
- Installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven, and washer/dryer;
- Repairing or removing an in-ground swimming pool;
- Installing smoke detectors;
- Making site improvements;
- Landscaping;
- Installing or repairing exterior decks, patios, and porches;
- Constructing a windstorm shelter; and
- Covering lead-based paint stabilization costs, if the Structure was built before 1978, in accordance with the Single Family mortgage insurance lead-based paint rule and the U.S. Environmental Protection Agency’s (EPA)
Sample FHA 203K Consultant Project Before / After:
All FHA 203K Renovation Loans require both Upfront Mortgage Insurance and Monthly Mortgage insurance for the life of the loan.
Fannie Mae HomeStyle® – Purchase AND Refinance
This HomeStyle® Renovation Loan is very attractive since unlike the FHA 203K there is no Mortgage Insurance if you put a 20% down payment. This Renovation Loan is also available to Owner Occupied, 2nd Home and Investment Buyers unlike the FHA 203K being restricted to only Owner Occupied Buyers.
The credit qualifying is a little tighter on this product in regards to previous foreclosures, short sales and BK’s but otherwise as an Owner Occupied Buyer if you have a minimum of a 620 Credit Score you can borrower up to 95% with mortgage insurance (available as a monthly premium, upfront premium or lender paid premium), however unlike the FHA 203K the monthly mortgage insurance will automatically go away once your balance drops to 78% of the original appraised value. If you are buying as a 2nd home or Investment Property you will need a minimum of 20% down payment with a minimum credit score of 620; however 2-4 units are not eligible as a 2nd home or Investment property.
The debt to income ratios are more restrictive than the FHA 203K but generally will go up to 45% compared to FHA 203K max of 55%. With the HomeStyle® Renovation Loan, the Loan Amount is based on 100% of the After Improved value unlike the FHA 203K basing the loan on up to 110% of the After Improved value. A huge difference with the HomeStyle® Renovation Loan is that you can complete Luxury Items in the Renovation Budget, such as: Pools / Gazebos / Pool House / Tennis Courts, etc.
Sample HomeStyle® Renovation Project Before / After:
Loan inquiries and applications in states where I am not licensed will be referred to a Loan Officer who is licensed in the property state. Equal Housing Lender. Prospect Mortgage is located at 15301 Ventura Blvd., Suite D300, Sherman Oaks, CA 91403. Prospect Mortgage, LLC (Unique Identifier #3296) is a Delaware limited liability company licensed by the Department of Corporations under the California Residential Mortgage Lending Act. Information and pricing are subject to change at any time and without notice. This is not an offer for extension of credit or a commitment to lend.
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