These loans most often come with lower interest rates than home equity lines of credit (HELOCs) and personal loans. This can make your renovations more affordable in the long term. They also take into account the projected appraised value of the property after the work is complete. This may increase the amount you can borrow. But these loans do come with some restrictions. They also need additional documentation.
How Does a HomeStyle Loan Work?
A HomeStyle loan allows you to take a single loan to fund both a purchase and renovation. Or, you can refinance your current mortgage to include the cost of the work. The terms of these loans can vary; they can include adjustable-rate loans and 15- or 30-year fixed-rate loans. You can finance renovation costs of up to the lesser of 75% of the expected appraised value of the home after the work is complete. Or, you can finance the price of the home plus the cost of renovations. HomeStyle loans can be used on any improvement project within the home’s current structure. This even includes luxury items such as hot tubs. They can also be combined with the HomeStyle Energy program. That program rewards you for upgrades that improve your home’s water or energy efficiency.
What Are the Pros and Cons of HomeStyle Loans?
Pros Explained
Low interest rates and down payments: HomeStyle loans come with competitive interest rates and lower down payments than other types of loans. Use any contractor: You can use any contractor you like to do the work. Just be sure they carry proper state licenses. Rebates available: Certain energy-efficient upgrades qualify for a $500 credit. Finance significant construction costs: These can be up to 75% of either the home’s forecasted appraised value after the project or the purchase price plus construction costs—whichever is less. Use for any home and many types of renovation: You don’t have to be the primary resident. You can use these loans for vacation homes and investment properties and for simple or major projects. Cover multiple costs: Use your loan to finance the full project, including inspection, consulting fees, titling, and more.
Cons Explained
No structural changes: You can’t use HomeStyle funds for structural changes to the house. You also can’t use this money for updates to anything not affixed to the property. Fannie Mae only: These loans must come from a Fannie Mae lender. Time limit: Work must be done within 12 months of closing the loan. DIY limits: You can do some of the work yourself. But your DIY efforts can’t amount to more than 10% of the final appraised value. Strict documentation and qualifications: The qualifications for these loans are also fairly strict. Your contractor will need to have the project plans drawn up and approved by an inspector before work begins. Minimum credit score: You must have a credit score of at least 620 to qualify.
HomeStyle Loan vs. 203(k)
HomeStyle loans aren’t the only option for those looking to finance home upgrades into their purchase (or those looking to refinance). The FHA 203(k) improvement loan program is another popular choice. These loans have many similarities; for instance, both have a high loan-to-value ratio and the inclusive buy-and-renovate structure. But there are a few key differences.
