Which renovation loan is right for your borrowers?

by Ryan Smith23 Jan 2017
Sometimes borrowers can save a significant amount of money by purchasing a “fixer-upper” home and renovating it. And there are mortgage programs that will let you customers purchase and renovate a home with one loan.

Both the FHA 203K renovation mortgage and the Fannie Mae HomeStyle mortgage allow buyers to borrow based on the improved value of the property. Both loans offer borrowers higher up-front loan amounts to cover the cost of the property and cash toward renovation, according to The Mortgage Reports.

They’re also both “one-time close” loans – which means that borrowers are applying for a single loan. Some other renovation programs require borrowers to get a construction loan first, then refinance later.

So which loan is right for your customer? Let’s break it down.

HomeStyle
If your borrower is putting less than 20% down, the Fannie Mae HomeStyle loan may be the best choice, according to The Mortgage Reports. Borrowers can put as little as 5% down, and while any down payment below 20% will require private mortgage insurance, it still might be cheaper than insurance on the FHA program.

HomeStyle loans don’t require upfront mortgage insurance premiums, while FHA loans come with upfront fees already included in the total mortgage. HomeStyle loans’ monthly mortgage insurance may cost less, too, depending on the borrower’s credit profile, according to The Mortgage Reports. FHA mortgage insurance doesn’t get any cheaper for higher-credit borrowers. And HomeStyle mortgage insurance is dropped once a borrower acquires 22% equity. With FHA loans, mortgage insurance is permanent unless you refinance to cancel it.  

FHA
The FHA 203K loan has its advantages too. Borrowers can qualify with a lower income than with HomeStyle, for one thing. The minimum down payment is only 3.5%.

And perhaps most appealingly, the FHA 203K loan’s minimum credit score requirement is low. Borrowers can get a 203K loan with a credit score as low as 580. The HomeStyle loan’s minimum FICO score is 620 – and most lenders will require an even higher score, according to The Mortgage Reports.
 

Poll

Is TILA-RESPA a good or bad thing long term?