203k vs. Homepath Mortgage

If the home of your dreams is more of a fixer-upper than move-in ready, you may be able to qualify for a Federal Housing Administration 203(k) mortgage loan.

If the home of your dreams is more of a fixer-upper than move-in ready, you may be able to qualify for a Federal Housing Administration 203(k) mortgage loan.

If the home of your dreams is more of a fixer-upper than move-in ready, you may be able to qualify for a Federal Housing Administration 203(k) mortgage loan that includes financing for the home’s repairs or renovations. Fannie Mae’s HomeStyle® Renovation mortgage can also help with home renovation and rehab costs. Or if your dream home is still at arm’s length because you can’t quite meet all the closing costs, you may be able to find some assistance with that, too, through Fannie Mae’s HomePath Ready Buyer™ program.

FHA 203(k) Rehabilitation Mortgage Overview

As part of the Department of Housing and Urban Development, the FHA was created by Congress in 1934 to help homeowners achieve the goal of owning a home. Since its creation, FHA has offered numerous programs, one of which is the 203(k) rehabilitation mortgage program. This program pairs potential homeowners with properties that need a little work, including repairs and improvements such as remodeling a kitchen or installing new carpet. The FHA uses its 203(k) program not only to assist homeowners with the purchase of a house but also to help revitalize neighborhoods.

FHA 203(k) Rehab Mortgage Details

A qualifying borrower can get a single mortgage loan that covers the purchase (or refinance) of a home and any needed repairs or improvements. For the purchase or refinance part of the 203(k) mortgage, a property’s value must adhere to FHA limits for the mortgages where the property is located. This property value must equal either the total of the value before the rehabilitation plus the cost of improvements or 110 percent of the appraised property value after the improvements are made. For the repair and rehabilitation part of the mortgage, these costs must be at least $5,000, and the FHA caps the total amount of potential rehab costs at $35,000.

What's Covered With a 203(k)?

Eligible improvements cover a wide spectrum, from minor repairs or cosmetic touch-ups to complete reconstruction. Even a home that has already been demolished or is scheduled to be razed may qualify as long as its foundation remains.

The FHA allows many types of improvements, including:

  • Aesthetic changes that improve or modernize a home’s appearance
  • Replacing or reconditioning a plumbing system; installing a septic system and/or well
  • Removal of health or safety hazards
  • Adding or replacing a roof, gutters and downspouts
  • Improving accessibility for disabled persons
  • Major landscaping work and site improvements

HomePath Ready Buyer Program Overview

Fannie Mae’s HomePath program, which ended in October 2014, helped borrowers buy foreclosed properties that had been reclaimed by Fannie Mae. The standard HomePath Renovation Mortgage financing program included foreclosed properties that typically were move-in ready and had simpler qualifying requirements. The HomePath Renovation Mortgage program included properties that needed repairs or renovation and, similar to the FHA 203(k) program, consolidated a purchase loan with a rehabilitation loan into a single mortgage.

Since its dissolution in 2014, the HomePath mortgage program has undergone a transformation. It’s now known as the Ready Buyer HomePath program, and it follows a different protocol than that offered by former HomePath mortgage lenders. Instead of providing combination purchase/rehabilitation loans, the new Ready Buyer program is available to first-time homebuyers and investors. Borrowers receive up to 3 percent in closing cost assistance when purchasing a HomePath property.

HomePath Ready Buyer Requirements

To qualify for the closing cost assistance, borrowers must attend an online HomePath Ready Buyer education course, available at HomePath.com. The cost is $75, but this fee is refundable as part of the total 3 percent in allowable closing cost assistance. Borrowers must complete the course and receive their Certificate of Completion before they make an initial offer in the HomePath Online Offers system.

The HomePath Ready Buyer education course is self-directed, with interactive lessons that borrowers can work through at their own pace on desktop as well as mobile devices. Most applicants finish the course in four to six hours, and the course is offered in English and Spanish.

Borrowers must also be first-time homebuyers, or buyers who have not owned a home in the past three years. Buyers are required to live in the purchased homes as their primary residence within 60 days of closing.

Comparing Renovation/Rehabilitation Mortgage Programs

If you’re trying to compare apples to apples with current mortgage programs, the FHA 203(k) program and the Fannie Mae HomeStyle Renovation mortgage program are more closely aligned with compatible features than comparing the FHA 203(k) with the Fannie Mae HomePath Ready Buyer program. The HomePath Ready Buyer program offers closing cost assistance, but it doesn’t offer repair/rehab financing in tandem with a purchase or refinance mortgage as was the case with the former HomePath Renovation program.

HomeStyle Renovation Mortgage Overview

Fannie Mae’s HomeStyle Renovation allows borrowers to finance their home improvements along with their conventional mortgage. Eligible homes can be the home a borrower currently lives in or a new home the borrower wants to purchase, and eligible loans include purchase as well as refinance options. With lender approval, loan funds can even be disbursed to the borrower before a renovation project begins.

HomeStyle Renovation Mortgage Details

Although there’s some latitude in underwriting for certain circumstances, general guidelines from Fannie Mae’s website include:

  • For the purchase and refinance part of the HomeStyle Renovation mortgage, Fannie Mae allows a maximum loan-to-value ratio of 97 percent for a single-family, owner-occupied property.
  • For the renovation part of the HomeStyle Renovation mortgage, Fannie Mae allows up to 75 percent of the lesser amount of the property’s purchase price plus the costs of renovation or the “as-completed” appraised value.
  • The HomeStyle Renovation program also includes manufactured housing. Eligible renovation costs are limited to the lesser of $50,000 or 50 percent of the “as-completed” appraised value.
  • Landscaping costs may also be included, as long as any improvements are permanently affixed to the property.
  • A property does not have to be habitable at the time of closing; if it's not, Fannie Mae allows the borrower to finance up to six months of principal, interest, tax and insurance payments to pay for these costs.

What's Covered With HomeStyle Renovation?

Unlike the FHA 203(k) rehabilitation mortgage, which lists eligible and prohibited renovation projects, Fannie Mae's HomeStyle Renovation program places no restriction on its eligible renovation projects. Also unlike FHA's rehab program, which requires borrowers to live in a 203(k) property as their primary residence, HomeStyle Renovation borrowers can finance a property as their primary residence, a vacation home or a rental home. HomeStyle Renovation mortgages do not carry an upfront private mortgage insurance premium as the FHA 203(k) loan does.

Bundling HomeStyle Renovation With HomeReady

Another perk of Fannie Mae's HomeStyle Renovation mortgage is that it can be bundled with another product – Fannie's HomeReady® program. HomeReady is structured for lower-income borrowers, offering a 3 percent down payment option. Borrowers can even use the income from nonborrowing household members to qualify.

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About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.