Fannie Versus The Government: Who Has the Best Home Renovation Loans?

When considering a home improvement project, most people will need to turn to a home renovation loan to finance the desired repairs and upgrades. Nowadays, there are two big kids on the block in the world of home renovation loans: Fannie Mae’s Homestyle loan and the government insured FHA 203k program. Let’s take a look at which one is better for you.

Both the FHA 203k program and the Fannie Mae (FNMA) Homestyle program have advantages and disadvantages. When it comes to home renovation loans for your home improvement project, the right choice will depend on your specific scenario. Here are a list of factors to consider when choosing the right program for you.

1. Down Payment

In the world of home renovation loans, nobody beats the government insured FHA 203k program in terms of down payment requirements. This program simply calls for a 3.5% down payment from the borrower, which is a very small amount for home improvement loans. And, to make things even better for borrowers, you can use gift funds from family members to pay that 3.5% for you. So, you wouldn’t have to pay any down payment out of your own pocket!

In contrast, the FNMA Homestyle program is going to limt loans to a 95% loan-to-value ratio. And, depending on the specific lender who is providing this specific product, they may want to see an even larger down payment around 10% or 15%. This will just depend on the particular bank.

Therefore, if the down payment is the biggest issue you are facing in terms of qualifying for a home renovation loan for your home improvement project, then you may want to consider the FHA 203k program over the Fannie Mae Homestyle. However, let’s look at some other factors to consider.

2. Types of Repairs and Renovations Allowed

The FHA 203k program has limits on what you can and cannot do for your home improvement. In fact, to make things a bit more complicated, the program even divides itself into two categories: FHA 203k versus FHA 203k Streamline. The Streamline version of the program is for smaller, non-structural repairs that won’t cost more than a total of $ 35,000. The regular, or full, FHA 203k program allows for structural repairs and costs in excess of $ 35,000; but, it still doesn’t allow for certain improvements such as fences. The key is to check with your lender to ensure you can do exactly what you want for your home renovation loan.

Conversely, the FNMA Homestyle program doesn’t limit the repairs you can make. So, in this particular case, you will have more flexibility and freedom if you can qualify for this program over the FHA 203k home improvement loan.

3. Loan Limits

Both programs will cap the amount of money you can borrow for your overall loan. For the FHA 203k home renovation loans, your loan amount cannot exceed the FHA loan limits for your particular county. To get these numbers, you can visit the HUD website or simply ask your lender. For the Fannie Mae Homestyle home improvement loan, the limit is set at $ 417,000 across the country.

4. Credit Scores

When it comes to flexible qualifying standards for borrowers, nobody can beat the FHA 203k program. It is designed to be accessible to as many borrowers as possible. Therefore, the credit score requirements are as low as a FICO score of 620. Plus, you will get the same low interest rates with a 620 credit score that you would get with a 720 score (see the section about interest rates below).

For home renovation loans through the FNMA Homestyle program, you will need a 680 credit score for any loan that is below the 80% loan-to-value limit. If you want to go above the 80% limit (i.e., you don’t have 20% to put down), then you will need at least a 700 credit score. And, unfortunately, the lower the credit score, the higher the interest rate is going to be, which makes the FHA 203k home improvement program that much more desirable in this case.

5. Interest Rates

As of right now, the FHA 203k program has interest rates as low, or lower, than any other renovation program in the country. Plus, as long as your credit score meets the 620 FICO requirement, then you are going to get the same great interest rates that a borrower who has a 780 credit score will get.

For the Fannie Mae Homestyle program, you can get rates as low as those for the FHA 203k home improvement loan as long as you have credit scores of 720 or higher. For borrowers with lower scores, the rates will increase.

6. Reserves

Reserves refer to the amount of money that a borrower has leftover in the bank after down payment and closing costs are paid for. With the FNMA Homestyle loan, you will need to have at least 2 months of loan payments leftover in your bank account to qualify. However, for the FHA 203k home renovation loans, there are no requirements at all for reserves. You can see how the FHA 203k program is especially flexible for borrower qualifications.

7. Mortgage Insurance

When it comes to paying mortgage insurance on home renovation loans, FNMA Homestyle is going to fit the conventional loan standards. In other words, you won’t have any mortgage insurance to worry about as long as your loan is below the 80% loan-to-value ratio. If you are above this limit, though, you will have to pay monthly mortgage insurance.

FHA 203k, though, has a more complicated system of mortgage insurance. Even if you are below the 80% loan-to-value ratio when you finance your home improvement project, you are going to have monthly mortgage insurance payments. Plus, on top of monthly payments, there will be a one-time, up-front closing cost called an Up-Front Mortgage Insurance Premium (UFMIP) with FHA that is 1.75% of the loan amount. This UFMIP can be financed into your home improvement loan, but it is still something to consider.

Overall, the mortgage insurance is almost always going to be more expensive for the FHA 203k program as compared to the FNMA Homestyle home renovation loans. But, this is just one small factor to consider in the overall comparison. In general, only the strongest borrowers with lots of cash or equity to use as a down payment are going to be a good fit for the FNMA Homestyle home improvement loans. But, the FHA 203k home renovation loans are going to be available to more people and are great products in themselves.
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