There are a lot of fixer-uppers on the market. Two primary types of rehabilitation mortgages are available: the Fannie Mae HomeStyle Loan and the Federal Housing Administration 203(k) Loan. Both options let you use a mortgage to buy a house and finance improvements.

An FHA 203(k) loan is a government-backed alternative with looser qualifying conditions than a Fannie Mae HomeStyle Loan, a conventional mortgage. Explore how your remodeling priorities, timeframe, and budget might inform your decision.

Loan Category

Conventional mortgages issued by Fannie Mae are called HomeStyle Loans. But the government guarantees 203(k) loans. It's a subset of FHA loans. Both sorts of financing have their drawbacks. A lower credit score is often sufficient for approval with an FHA loan.

Furthermore, this lending option permits a smaller initial investment. But if you have a high enough down payment, traditional mortgages don't usually need mortgage insurance. Plus, you can drop this protection if your loan-to-value (LTV) ratio is under a set threshold.

This might reduce the cost of your regular bills. If you put down less than 10% on a 203(k) loan, you may be required to pay mortgage insurance every month.

Qualifications

Fannie Mae HomeStyle Loans and 203(k) have slightly different requirements. FHA 203(k) requirements are laxer. A credit score is one of the most important considerations in determining your loan eligibility.

You need a credit score of 620 or higher to qualify for a HomeStyle loan. In addition, your debt-to-income ratio (DTI) must be lower than 45%. 2 A person's debt-to-income ratio is determined by dividing their monthly debt payments by their monthly income. The minimum credit score for a 203(k) loan is $500. Your total DTI is considered.

The time spent on the front end must be 31% or less, and the percentage spent on the rear end must be 43% or less. 3 A lower DTI may be permitted, however, if substantial mitigating variables are present.

Financing Eligible Properties

There are limitations on what properties qualify for an FHA 203(k) loan, such as the requirement to be used as the borrower's primary residence. Under these rules, one can only remodel a property with one to four apartments. One caveat, though: you have to really reside there.

FHA-approved condominiums, prefabricated houses, and multi-family buildings with one to four units are on the market. Over 50% of residential space is required before a mixed-use building can be purchased. 5 There is more leeway with a Fannie Mae HomeStyle Loan.

It functions similarly to a 203(k) in that it can be used to purchase or improve a primary dwelling that the borrower will live in. A second house or investment property that will only be occupied by one family may qualify for this financing.

Minimum Initial Investment Requirement

Both types of home improvement loans need an upfront deposit. Contrarily, the FHA loan, which is guaranteed by the government, usually has a smaller one. A 3.5% down payment is required if you choose this option. 5

Put down between 5% and 25% to qualify for a Fannie Mae HomeStyle Loan. A down payment of at least 20% is required to avoid paying for mortgage insurance.

Cost Cap for Home Improvements

You should be sure you can afford to make significant repairs to the home you're buying if it requires them. The HomeStyle loan allows you to borrow up to 75% of your home's after-renovation worth. The smallest amount you may borrow for a 203(k) remodel is $5,000.

There is no hard cap on the amount spent on repairs, provided that you don't choose a "limited" 203(k) loan that caps out at $35,000.

Permitted Styles of Remodeling

Regarding home improvements, the requirements for getting approved for a Fannie Mae HomeStyle Loan and an FHA 203(k) loan are distinct.

The 203(k) program will fund demolition and rebuilding from the ground up if it is determined that the original structure's foundation is sound. These demolitions are not covered by a HomeStyle loan, only repairs.

The Conclusion

Whether you go with a Fannie Mae HomeStyle Loan or a 203(k) loan, remember that both options can help you change your current home into the dream home of your dreams. The nature and extent of the necessary repairs and your available savings will play a role.

Repairs that affect the health and safety of the occupants or that fall into certain categories designated by the FHA are good candidates for the 203(k) program. If you're looking for a loan with more leeway, consider the HomeStyle option. This loan provides a forgiving repayment schedule, making it an attractive option when options matter.