FHA 203k Construction Loans

FHA 203k Construction Loans…well not exactly.

Some might think that a 203k loan is a construction loan but actually it isn’t. Although a 203k can be used for remodeling, renovations and repairs there is a difference between this FHA loan and a construction loan.

The main difference is that construction loans can be used to build a brand new property from the ground up on raw land. 203k loans on the other hand are only for properties that are at least one year old and that already have an existing foundation. Along with that there are loan limits that apply to FHA loans which vary depending on your area.

Once you remove those two major differences, then the 203k does have similarities to a construction loan as far as the type of work that can be done to the property as well as how contractors get paid as the work gets completed. The 203k may have some similarities, but unlike a construction loan, the 203k offers the following features that a construction loan doesn’t.

The 203k:

• Can be used to purchase or refinance an existing property and includes the funds needed for improvements combined


• Has a low down payment for purchases


• Has minimal equity requirements for refinances.


• Has the same current attractive interest rates like other first mortgages


• Is an all in one loan with terms up to 30 years.

If only they could come up with one loan to buy/refinance, include the improvements and pay off debts! Now that would be something. But, in the meantime 2 out of 3 aren’t bad with the 203k loan.

Homepath Renovation Mortgage Financing and the FHA 203k Loan

Have you ever driven past a home with a sign that says “Fannie Mae Homepath"? If so, and if you’re in the market to buy a home then this could be another option for you to add to your property search. So, what is a Homepath property? It’s a property which is currently owned by Fannie Mae and was acquired through the foreclosure process. The name “HomePath” is the branding term used for these Fannie Mae-owned properties.

There is no special requirement for you the buyer as HomePath properties can be purchased like any other property on the market with or without financing. It can be purchased as an owner occupied (your primary residence), an investment property or even as a second home. Fannie Mae also offers its own financing product specifically for these properties called a “HomePath Mortgage”.

Just like HUD homes, Homepath properties can have an advantage of being financed with the same type of home loan originally used before it was foreclosed on. On HUD homes that would be FHA insured financing. For Homepath properties that would be a “Homepath Mortgage”. There are two types to choose from, one with renovations and one without. Depending on the property it will indicate which type of Homepath financing is available which you can find at the HomePath website.

HomePath Mortgage: The “HomePath Mortgage” has a minimum down payment of 3% and no mortgage insurance or appraisal is required, which is a great feature. But, in exchange for a home loan with no mortgage insurance which is typically required, there may be a higher interest rate in comparison to other home loans with mortgage insurance. For the most part, the monthly payments would still be within the same range so using a “HomePath Mortgage” when buying a “HomePath property” could still be your best bet. Both “owner occupied” buyers and investors can apply for the “Homepath Mortgage”.  

HomePath Renovation Mortgage: For properties needing minor or moderate repairs Fannie Mae offers the “HomePath Renovation Mortgage”. It works similar to the FHA 203k loan in the sense that it is one loan amount which includes both the funds for the purchase and renovations but it has more limitations than the FHA 203k loan.

For instance “HomePath Renovation Financing” allows for light to moderate renovations of a property with a limitation of 35% of the “as completed value” with a maximum renovation amount of $35,000. Light to moderate renovations are ones that will allow the borrower to live in the property while the renovations are completed. Those repairs will be identified in the appraisal, including any cosmetic repairs identified by you, the buyer. Both owner occupied buyers and investors can apply for the “HomePath Renovation Mortgage”.  

HomePath & FHA Lenders Now even though “HomePath properties” give you the option to use a “HomePath loan” you can also purchase the property with any other type of mortgage financing as well. Your best comparable alternative, if you plan to purchase as owner occupied with a minimal down payment, would be an FHA loan. The FHA loan has a similar minimum down payment of 3.5% which is only a half percent (.5%) more than a “HomePath Mortgage”. And if the property needs improvements, be it minor or major rehab, you can utilize the FHA 203K. FHA loans also have a bit more flexibility in qualifying plus on average a lower interest rate. As a reminder, FHA loans do require mortgage insurance.

Having choices and making sure you get the right loan for your “HomePath Property” is important so the first step you should take is to talk to a lender. Keep in mind though, not all lenders are approved or specialize in these types of loans. So, whether it’s the “HomePath Mortgage” the “Homepath Renovation Mortgage”, FHA or FHA 203k loan choose wisely. A good start would be contacting your 203k Loan Specialist for your State on more information regarding your “HomePath” and FHA 203k options.  

 

Happy House Hunting.