HomeStyle, 203k, and other renovation loans for first time buyer
Investor · Chattanooga, TN · Member since 2015 · 82 posts · 25 votes
Hello, I'm looking to purchase my first home and am looking for any input on these types of loans. My plan is to live in the property while doing some small to medium type renovations (upgrade kitchen, put in hardwood flooring, other minor cosmetic things.) I don't plan to keep the house more than a few years. Would it make more sense to get a loan with a smaller down payment and pay for renovations myself, or to finance the renovations with this type of loan? I would like to do as much of the work as I can on my own, to learn how to do these things and to save labor costs. I will also be renting out a few bedrooms to family while I'm living there, so i would probably be able to save up 500-1000 of my own money, per month, towards renovations or else save it for the next house/investment.
I'm very new to this, so i apologize if the information is too vague haha, any input would be greatly appreciated!
Hi there, I would say, it would depend highly on what your inspection report says about the condition of the home. There are some areas that you can do on your own. But leave the more intricate and sensitive parts of updating your home to the professionals. As far as a 203k loans, let me assure that you can only utilize this loan with a bank-approved contractor. I've gone through process myself with Wells Fargo and my company happens to be one. I would consider giving priority to areas that requires immediate attention and perhaps get a loan for that and leave some of the work you know you can handle for yourself. Remember, that there are some things you should leave to the professionals. Your safety and that of your family is worth more. Good luck!
Hi Alec, if it's not going to cost you too much money and you can afford to do it on your own dime (and time), then I don't think it's worth getting a renovation loan for. Especially if you can live there and even rent a couple rooms while you are still renovating ... that means you aren't holding up revenue because of waiting for the renovations to be finished - this allows you to take your time, etc. etc.
If you can throw a little more money at it sooner and get it all done faster, you can use a HELOC to pull that money back out once the work is done, based on assuming that the property value will have increased because of the work you did.
I love the Homestyle loan (which I think is better than the FHA 203K option), but only if you need it. All renovation loans will cost a little more, but worse than that, you have to go through the red tape with the bank, which can feel a bit cumbersome ... you have to ask for permission to change your plans, and you are supposed to wait for their approval, etc. etc. In the end, you'll get a better rate and get all your money back if you do it yourself.
Also, one drawback to the HS loan vs FHA - they don't have a "streamlined" HS loan, compared to the FHA 203K Streamlined version. This is a loan that is $35K or less, and they allow you to work on your own project. The "Full" version of the FHA (over $35K) and the HS option require hiring a contractor that will be accountable to the bank, and you have to find a contractor that is willing to do this type of project ... many stay away from it because they often won't get paid quickly by the banks and it hurts their cash flow. You might get charged a higher rate by the ones that are willing to do renovation loan projects for this reason.
It's totally worth it in some situations, but it sounds like your situation can be handled "in-house" so to speak, so if I were you, I'd pursue it that way.
Good luck!
Ryan already covered this this point, but its worth hitting on again: if you do a reno loan you won't be able to work on your own project (except possibly with the stream lined FHA 203k) as the bank will expect a licensed contractor do the work and be accountable for it. Also I believe the work needs to be completed in 6 months, so you wouldn't be able to take your time and learn as it sounds like you want to do.
Thats not to say that they aren't great options to consider, just something to think about when making a final decision.
Thanks for the input! I was leaning towards conventional until yesterday. I had an inspection and the house needs, in my very non expert opinion, 15-20k in work that I wouldn't be able to afford, nor do on my own(mainly new siding and masonry work). That being said, which of these loans is generally less expensive if I were planning on owning the house 2-5 years? The house is a short sale, so I have time to wait if the loan process is longer than normal..
Hi there, I would say, it would depend highly on what your inspection report says about the condition of the home. There are some areas that you can do on your own. But leave the more intricate and sensitive parts of updating your home to the professionals. As far as a 203k loans, let me assure that you can only utilize this loan with a bank-approved contractor. I've gone through process myself with Wells Fargo and my company happens to be one. I would consider giving priority to areas that requires immediate attention and perhaps get a loan for that and leave some of the work you know you can handle for yourself. Remember, that there are some things you should leave to the professionals. Your safety and that of your family is worth more. Good luck!
Hello, I'm looking to purchase my first home and am looking for any input on these types of loans. My plan is to live in the property while doing some small to medium type renovations (upgrade kitchen, put in hardwood flooring, other minor cosmetic things.) I don't plan to keep the house more than a few years. Would it make more sense to get a loan with a smaller down payment and pay for renovations myself, or to finance the renovations with this type of loan? I would like to do as much of the work as I can on my own, to learn how to do these things and to save labor costs. I will also be renting out a few bedrooms to family while I'm living there, so i would probably be able to save up 500-1000 of my own money, per month, towards renovations or else save it for the next house/investment.
I'm very new to this, so i apologize if the information is too vague haha, any input would be greatly appreciated!
Legal stuff first: I am a licensed Sr. Loan Originator NMLS# 1157855 and am currently licensed to originate in IN, OH, KY & FL. If you are not in those states what I say may or may not apply to you. Please consult an advisor in your state. That being said you can not use the 203k unless you are using a Contractor. However it sounds like you may want to just use a regular loan to buy the property if you are only doing upgrades and then refinance down the road to take cash out. It really depends on the condition of the property and your financial shape. Some place will allow you to purchase and turn around and get a fixed rate Equity Loan to do Upgrades. You really should talk with an LO and decide which course suits your needs.
I believe, like @Joe Norman mentioned, that you can do your own work on a 203K Streamlined renovation loan, which maxes at $35K for the renovation work. However, you mention that you think you would have to hire someone anyway as it is work you don't think you can do yourself.
My opinion is that the Homestyle is always better than the FHA options, unless you are trying to do your own work and want to utilize the 203K Streamline option. I'd say get a homestyle loan and have a contractor do only the work you don't want to do, and then finish the construction loan portion at that point. Afterwards, then you can work on your own home as much as you want (although this will now be on your time and your dime).
FHA loans generally cost a bit more overall and tend to have a higher mortgage insurance, which you can only get rid of if you re-fi out of the FHA loan. Conventional Homestyle is less restrictive and gives you a better overall value, in my opinion.
I just re-read the Fannie Mae fact sheet for the Homestyle Renovation loan, found here:
https://www.fanniemae.com/content/fact_sheet/homes...
Apparently, I mispoke ... you CAN do your own renovation (see page 3, first section), with the following conditions:
1 - The lender agrees to it
2 - The renovation amount doesn't exceed 10% of the as-completed value
3 - The property is a one-unit, owner occupied home
Also, from page 1 - you have up to 12 months to finish the project, although I believe that is also partially decided by agreement with the lender, and they may be able to extend it depending on the circumstances.
Just wanted to correct the record for anyone else reading these posts.