Approximately 60% of real estate sales in recent years have been through foreclosure and short sales and many of those homes are left in less than pristine conditions, according to David Margulies, executive vice president of global sales at American Financial Resources (AFR). The result is lower-priced homes that have sat dormant.
“These properties come to market tired and in need of work,” said Margulies. “Buyers think, ‘I love this house. It has everything I want, but it has olive green carpet and gold appliances,' and the buyers typical don’t have the out-of-pocket money to make the improvement. That’s where you can use a 203K to buy the property and do the work.”
One of the biggest benefits of 203K loans is that borrowers can obtain a single loan at a long-term fixed or adjustable rate. The loan program can help borrowers with uncomplicated improvements to a home for which plans, consultants, engineers and/or architects are not required. The program is also better suited for borrowers with credit issues. However, luxury additions, like adding a swimming pool, aren’t covered.
- 203K Refinance Loans: May finance up to 97.75% of the "to be improved value" or "as is” appraised value, plus the total cost of all rehabilitation/repairs" (whichever is the lesser).
- 203K Purchase Mortgage: May finance up to 96.5% of the "to be improved" value of the appraisal or 96.5% of the sales price, plus the total cost of all rehabilitation/repairs (whichever is the lesser).
The HomeStyle program will cover most of the same repairs as a 203K, but adds more flexibility for borrowers to make exterior changes and allows for luxury items like a new pools, spa or exterior kitchen. Many people use the program to renovate their vacation homes or investment properties.
- HomeStyle Refinance Loans: May finance between 85% to 95% of the “as-completed” value, plus the total renovation cost (whichever is lesser). Financing terms depend on if it is your primary residence, second home or investment property.
- HomeStyle Purchase Mortgage: May finance between 75% to 95% of the “as-completed” value, plus the total renovation cost (whichever is lesser). Financing terms depend on if it is your primary residence, second home or investment property.
"These really are two different programs that you need,” said Damon Richardson, HomeStyle program specialist at AFR. “Each has its own value. The 203k has a more broad-based appeal and is used more for minor renovations, while the HomeStyle program is for borrowers looking to create their custom dream house."
With an aging housing inventory and home values continuing to rise, borrowers can save money and build instant equity by purchasing a fixer-upper with a 203K, or opting for a HomeStyle mortgage.