fha 203K or homestyle reno loan

[Maleshia Gilcrease]

Good afternoon,

I am considering doing a house hack using the FHA 203K or Fannie Mae Homestyle loan. I would like to either create an adu or house hack a multifamily that may need some work. Does anyone have any referrals for a lender that will finance this loan in the DFw metroplex. I would greatly appreciate any referrals for consultants and contractors as well. Your feedback would be greatly appreciated.

[Jonathan Greene]

I prefer 203k to Homestyle in general. Have you ever done a renovation? Doing a 203k on a multi can be challenging, depending on tenants so your best bet is to get one vacant, but then you are at a full loss while construction is going on.

[Bryan Maddex]

Both 203k and HomeStyle are great products, there is not a "best". I have experience doing both and am happy to help you with your lending needs!

There are some additional things that could help determine which loan product is best for your situation.

203k Best When:
- Credit scores 680-720 or less
- Renovation will improve the value of the home more than 75%
- Renovations will be on or in the home - no new yard projects, only fixing existing
- Higher Debt To Income (can get approval with up to 56.9% dti)

HomeStyle Best When:
- Purchase + Renovation costs will come in higher than FHA Limits
- Home improvements will only improve vale 75% or less 
- 720+ credit or 20% down (of purchase price + reno cost) to avoid PMI
- Exterior Projects (fence, hardscaping, pool, outdoor kitchen)
- Lower Debt To Income (sometimes as high as 50%, many times between 45-50%)
- Renovations that are greater than $35,000 (soon this will move up to $75,000)

Happy to answer any other questions that you may have!

[Andrew Postell]

@Maleshia Gilcrease thanks for the post!  Always great to hear from a fellow Texan.  I do write these loans and have many posts about them.  Reach out if you want to talk any specifics.  Here's the general outline for them:

Renovation loan programs can finance the purchase and renovation of a home in one loan. When the transaction closes, the purchase is funded, and we set aside additional funds in an escrow account to pay predetermined professionals to make any required or desired repairs or upgrades to a property AFTER the buyers settle on the purchase transaction. The loans are fixed rate programs, and the additional renovation financing is included into the one loan. The down payment is based off the total adjusted acquisition cost – the purchase price plus the cost of renovations. The down payment on owner occupied properties can be as little as 3% on owner occupied properties. These loans allow buyers to purchase a property “AS IS, WHERE IS”.

Renovation loans are available in 30, 20- and 15-year fixed rate terms and can be used to purchase owner occupied, second home and investment properties.

By time the renovations are completed, the home needs to be in move-in, live-in condition and conceptually ready to be resold without repair issues.

Other Important Items to Know about “Conventional” Renovation Loans

Maximum – Minimum Purchase/Upgrade Amounts:

Maximum: Limited to 75% of the “after improved” value

Occupancy: Primary, Second Homes, Investment Properties

Renovation Term:

• The renovation term for this program is a maximum of 180 days.
• The Borrower(s) is responsible for the work being completed within the escrow period. If the work is not 100% complete by the end of the Escrow period, may implement a .50% (on total loan balance) extension fee that will cover an additional construction term of 60 days. Borrowers will be provided an upfront disclosure detailing this information.

Contractor(s) Acceptance:

• Ø does not “approve” contractors or refer contractors. A borrower must choose his or her own contractors to perform the needed renovation.
• Ø All Contractors participating in the HomeStyle Renovation Program must complete a Contractor Profile Report. All Contractors are subject to the lender’s determination that the contractors are qualified and experienced, have all appropriate credentials required by the state, are financially able to perform the duties necessary to complete the renovation work in a timely manner, and agree to indemnify the borrower for all property losses or damages caused by its employees or subcontractors.

Multiple Specialized Contractors:

• Ø Since this is a limited repair/renovation program, no General Contractor is required. However, A General Contractor will be required on all renovation projects over $25,000. Borrowers are not allowed to complete any of the work themselves as sweat equity.

Loan to Value Calculations:

The original principal amount of the mortgage may not exceed Fannie Mae’s maximum allowable mortgage amount for a conventional first mortgage.

• Purchase: For a purchase money transaction, the LTV is determined by dividing the loan amount by the lesser of the "as completed" appraised value of the property or the sum of the purchase price of the property and the total rehabilitation costs.
• Refinance Transactions: For a refinance transaction, the LTV is determined by dividing the original loan amount by the "as completed" appraised value of the property.

Eligible Renovation:

• There are no required improvements or restrictions on the types of repairs allowed. However, repairs or improvements must be permanently affixed and add value to the real property.

Costs and Escrow Accounts

• The costs of the renovations will be based on the plans and specifications for the work and on the Construction contract for all of the work requested by the borrower. The renovation costs may include a contingency reserve and renovation-related costs.

Contingency Reserves:

• Contingency reserves 10 % required for any unforeseen cost overruns that may occur during construction.
• Unused contingency reserves that were financed into the loan will be applied to the principal balance of the loan. If the contingency reserves were paid in cash, they may be refunded to the borrower.
• The contingency reserve may be considered as part of the total renovation costs or the borrower may fund it separately. The contingency reserve may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation. Unused contingency funds, unless they were received directly from the borrower, must be used to reduce the outstanding balance of the renovation mortgage after all of the renovation work has been completed and the certification of completion has been obtained.
• The loan is not re-amortized.

Draw Schedule:

• The HomeStyle program has a maximum 4 draw process.
• The initial draw can be up to 50% of the total project and can be for materials for the project.
• The final draw will be at least 10% of the total project as retainage and funds will be released upon receipt and approval of final inspection, Certificate of Completion from Appraiser, signed All Bills Paid Affidavits and Lien Waivers.

Additional Draw Information:

• Ø Signed Draw Request by borrower and contractor
• Ø Signed All Bills Paid Affidavit
• Ø GMG review and approve the draw request and will release funds for disbursement
• Ø A check will be issued in the name of the borrower and contractor and delivered to borrower via USPS
• Ø An inspection of work to date will be performed at 50% complete

Final Draw Information:

• Ø Signed Draw Request
• Ø Final inspection/Completion Certificate will be required for release of final funds
• Ø A Title Update showing property free from lien or encumbrance
• Ø General Contractor’s Lien Waiver Affidavit
• Ø Affidavit of Completion GR will review and approve the draw request and will release a check in the name of the borrower and contractor.

Change Orders and Cost Overruns:

• Changes to the initial plan are not permitted unless prior approval by Guaranteed Rate. Any work outside the scope of the initial plan is not permitted as the loan amount cannot be increased.
• If the project encounters cost overruns, those cost overruns will be the responsibility of the borrower to pay.

Renovation Term Extension Fee:

• .50% of the total loan balance. This is a post-closing penalty charged by the Escrow Administrator to extend the renovation period beyond the maximum renovation term of 180 days in the event renovation is not completed within agreed upon terms.

Other Important Items to know about FHA Renovation Loans

A FHA option to roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

1. “Streamline Option” – or “Limited Repair Program”
   1. Total financed rehabilitation costs cannot exceed $35,000
2. Maximum Sub-Contracts is 3
   • If more than 3 are needed then a General Contractor will be required
3. Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option

1. Full Repair Option
   1. Minimum of $5,000 in improvements
2. 203k Consultant is required

FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish

1. Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.

Contractor Approval

• Contractor must be accepted by Renovation Department prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed..
• Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
• Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
• Borrower selects contractor

Contingency Reserves

• Minimum 10% is required. Can be financed.
• With “Full” version – 20% reserves if renovation is major – foundation, room additions

Draw Requests

• “Draws” are funds paid to the contractor after work is completed.
• For “Streamline” – pictures of completed work is permitted
• For “Full” – Consultant inspects work
• Work must be completed within 6 months of loan closing
• No upfront draws permitted

VA RENOVATION LOAN

Contractor certified by VA

HUD Consultant is required

15% contingency

$50,000 renovation max

So with the 15% contingency…that means about $42,000 renovation max because of the 15% contingency

[Jonathan Klemm]

Hey @Maleshia Gilcrease - I absolutely love both the FHA 203k & Homestyle loan programs and think they are the best way to get started in real estate investing.

By far, the most important part of executing a renovation loan is making sure you have the right team. Your team will consist of your real estate agent, lender, HUD Consultant, and general contractor - PLEASE MAKE SURE EACH MEMBER HAS DONE THIS TYPE OF LOAN IN THE PAST.

I wish you were in Chicago...we'd love to help you on the renovation side, but have not expanded the general contracting business to Dallas yet.  Our rockstar renovation lender does do deals in that area so I can share his information if you are interested.