Real Estate

FHA 203(k) vs Conventional Renovation Loan: Know the Facts

May 23, 2023

Looking to make some major changes to your current or new home? Rather than juggling multiple loans and paying a premium rate for a home equity loan, HELOC, or cash-out refinance, you can roll your renovation budget into a single mortgage payment with the right loan.

While they both fit the bill for a combination mortgage-and-remodel product, the two most common options have important differences. Let’s take a closer look at a conventional renovation loan vs 203(k) loan and see if either is the right model for your needs.

What is a Conventional Renovation Loan?

A conventional renovation loan combines the cost of a new property (or remaining mortgage on a current one) with the cost of repairs and upgrades. There are two primary types of conforming renovation loans:

Fannie Mae HomeStyle® Renovation Mortgage
Freddie Mac CHOICERenovation® Loan

Both are available as either fixed- or adjustable-rate mortgages (15 or 30 years) and are nearly identical in terms of qualification and guidelines. With either, you can plan any type of standard remodel to the structure or grounds, including additions and luxury features, that can be completed within 12 months of the loan date. You’ll need:

A 620 or higher credit score¹
3% – 5% down payment for a primary residence, 10% for a second home
15% down payment for a single-family home or multi-unit investment property

A key feature unique to the CHOICERenovation loan is the ability to finance home resilience and disaster proofing.²

What is a 203(k) Loan?

An FHA 203(k) loan is a type of FHA loan that also folds the cost of renovations into a single mortgage, but its primary function is to help those with less-than-stellar credit histories or debt loads qualify for homeownership. 203(k) mortgage qualifications include:

Credit score minimums starting at 500³
Down payments starting at 3.5%
Debt-to-income ratio (DTI) at high as 50%

Key Differences between Conventional Renovation Loan vs 203(k) Loan

While there is a lot of overlap, a close look at a 203(k) vs conventional renovation loan highlights some important differences.

Mortgage Insurance

Conventional rehab loans follow the standard policy on mortgage insurance: you can avoid it altogether with a 20% down payment, or stop paying it once your equity reaches 22%.

But with a 203(k), mortgage insurance never stops. You’ll pay it for the life of the loan until you sell or refinance your home. Plus, in addition to monthly payments, you’ll have to cough up a one-time mortgage insurance payment at closing equal to 1.75% of the total loan amount.⁴

Type of Residence

How does a 203(k) loan work? An FHA 203(k) loan can only be used for a primary residence, but a conventional renovation loan provides more opportunities. You can use conventional renovation loans for a:

Primary residence
Second home
Single-family rental home
Multi-unit investment property

Scope of Renovations

While you can’t just blow up the current structures and start from scratch, almost anything other than a total rebuild is an option with a conventional rehab loan.

On the other hand, a 203(k) loan limits the range of renovations, particularly excluding luxury upgrades such as pools, outdoor kitchens, or tennis courts.

Renovation Timeline

Another point to consider when comparing a conventional renovation loan vs 203(k) is that you’ll have 12 months from the loan date to complete conventional rehab loan projects, but just six months for a 203(k) loan.

Who Benefits from Each Loan Type?

Different requirements, different guidelines—either type of loan will allow you to roll the cost of renovation into a single monthly mortgage payment, but they’re each designed to meet specific needs.

Best Loan Option for Homeowners

Consider the scope of your renovation needs and your financial footprint. If you have difficulty qualifying for a conventional mortgage, then the FHA 203(k) loan is likely your best choice.

However, if you can qualify for it, a conventional renovation loan may provide a lower interest rate, lower total cost in mortgage insurance, and more time and choices for rehab projects.

Best Loan Option for Real Estate Investors

Investors can opt for either the Freddie Mac or Fannie Mae HomeStyle® loan for single-family or multi-unit rental properties.

Key Takeaways

Financing home renovation isn’t a one-size-fits-all scenario. Property condition, financial picture, and prioritized goals all play a role in deciding what type of funding works best for you. To avoid taking on new debt, consider a sale-leaseback that converts your equity to cash without leaving your home.

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