203k, HomeStyle, other Low Down Payment option w/ Peeling Paint?

Question

Hi everyone,

I'm a 27-year-old young professional looking at buying my first house (owner-occupied duplex) in the Midwest. I have quite a bit of student debt, but a good credit score (750+) and high annual income. After researching mortgage options, a low down payment mortgage (5% or less) is really appealing (even with mortgage insurance) as it opens up a higher price point, and I've run the numbers extensively and know that it will work for me (plus save me money over my current rent). I have a potential off-market deal on a duplex that looks to be a great deal (and is currently very livable), but needs some TLC (peeling paint on wood siding, etc.), most of which I can do myself. I was pretty much set on an FHA 203k or Fannie Mae HomeStyle loan to bundle some of the major renovation costs (add central A/C, etc.) into the mortgage, but looks like I may run into a few hiccups.

• 1. It appears that FHA loans do not allow for peeling paint. Could I still get a 203k approved if painting was bundled in the mortgage?
• 2. However, I'd much rather paint myself and am very capable of doing it. Any way I could get a 203k for other renovations but do the painting myself?
• 3. It appears the HomeStyle mortgage is less strict, but one reference shows that owner-occupied duplexes require 15% down - can anyone confirm?
• 4. Any other options for a low-down payment loan that bundles in renovation costs, but could be approved on a house with peeling paint (maybe something that is contingent on me painting house within 90 days or something)?

Thanks so much for any advice!

Bill Rich · Answer

No problem at all! Let me clarify the HomeStyle pretty much works the same way with the self-help standards, its allowed by guideline but most lenders (including my company) do not allow self-help.

Rates for a 203K are going to be higher than that of a standard non-renovation FHA loan. Typically I see a spread of about .25% to .50% higher depending on the days market activity and rate sheets.

Eric Helder · Answer

@Bill Rich, thanks so much for the thorough response! Bummer to hear that HomeStyle is 15% down since it sounds like otherwise it's an option that would let me do painting myself. I'm not opposed to doing a 203k and having a contractor paint, I'd just have to make sure it would fit into my overall budget/total mortgage price for the house. I suppose another option would be to talk to the seller (an acquaintance of a friend) and see if they'd let me do painting with a firm commitment/contract to buy the house, but that's probably risky.

One more question if you don't mind. I was preliminarily quoted a 2.5% interest rate for a 30 year term on a regular FHA loan. I assume a 203k has a higher rate due to more risk for the lender, do you know about how much higher on average the rate is versus a regular FHA loan? Thanks so much!

Bill Rich · Answer

Hi Eric

Your questions are some great ones to ask as a first time buyer and buying a duplex is a great way to help offset your mortgage payment, so congrats!!

Let me address each question for you as I have a lot of experience with rehab loans like the FHA 203K and the Fannie Mae HomeStyle.

1. The 203k will allow for peeling paint or any other cosmetic issues as such. In fact there really isnt much you cannot fix with a 203K. Just because it is an FHA product doesn't mean the home has to be in excellent condition.

2. This is tricky, while FHA does allow for what is called "self-help" there are not many lenders who will allow for it. That said I would not plan to do any work yourself in the grand scheme but if you have the right contractor you may be able to work with him to help shave your budget.

3. Yes the HomeStyle requires 15% with a duplex and essentially has no restrictions on what you do to the property. In contrast to the 203k which requires 3.5% down but does have some restrictions. Those restrictions are going to be more geared towards luxury items like putting in a pool or a sauna.

4. The 203K would be your best and only option for the low down-payment renovation loan.

Any other questions you have please feel free to reach out.

203k, HomeStyle, other Low Down Payment option w/ Peeling Paint?

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