Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
If you are in the market to buy a home, chances are that you have seen at least one property that is either a short sale or a bank-owned property.
And based on what I have seen, many short sales or properties that are currently owned by the bank are in need of a few repairs before anyone can live in them.
Which is why I get quite a few questions about two of the most popular loan programs designed to help homeowners finance needed repairs on a new home: the FHA 203k program and Fannie Mae’s HomePath mortgage program.
One of the more common quick questions I hear when people are learning about these loan programs is:
“Which is better, the HomePath mortgage or the FHA 203k loan?”
The simple answer to this question is “it depends” and before I give you a simple formula that might help you choose between the two programs, here is a quick review of each loan program.
The FHA 203k and FHA Streamline 203k Loans
The FHA 203k loan program can be grouped into two different types of loans: the FHA Streamline 203k loan program and the FHA 203k loan. The FHA 203k streamline is designed to be a limited repair program and has simpler processes and no HUD consultant required like on the full FHA 203k loan. In my experience, the FHA 203k streamline is a more popular option since many of the needed repairs for bank-owned homes can be considered “cosmetic.”
Highlights of the FHA 203k streamline loan include:
- It works very similar to a construction loan – it allows you to purchase a home that wouldn’t qualify for FHA financing due to repair work being needed
- The loan amount is equal to the purchase price of the home plus the amount needed for repairs
- FHA 203k streamline program allows for repairs ranging from $5,000 and $35,000
- Qualifying for FHA 203k loans are the same as regular FHA loans
- Repair work cannot begin until loan closes and the money to pay contractors comes from an escrow account set up when the loan closed
- FHA 203k loans require UFMIP and MIP just like regular FHA loans
- Appraisal required
- Currently available for owner-occupied properties only although I have heard rumors of an “Investor 203k loan” coming soon.
Fannie Mae HomePath Renovation Loan
When the housing downturn began and Fannie Mae started owning more homes than ever before, one of the things Fannie Mae did to help move the homes to new owners was to design the HomePath mortgage program.
The HomePath mortgage program has two different programs within it – the HomePath loan and the HomePath Renovation loan.
For homes that are in need of repairs, the HomePath Renovation loan is the loan program that is often compared to the FHA 203k loan when weighing options.
HomePath Renovation loan highlights include:
- The property must be currently owned by Fannie Mae
- The loan amount is for both the home and the repairs required for the home
- Repairs can be up to 35% of the as-completed value, but not to exceed $35,000.
- Down payment requirements can be as low as 3%
- Fixed or adjustable rates are available
- No mortgage insurance required
- Investment properties or 2nd homes and investment properties are allowed
- No appraisal required
- Lenders can be difficult to find, not every lender is HomePath approved and many HomePath approved lenders do not offer the HomePath Renovation loans
HomePath Renovation Loan or FHA 203k Loan?
When deciding on financing for a home that is in need of repairs, the Fannie Mae HomePath Renovation loan program and the FHA 203k loan program are what most people are going to select.
Is there an easy way to select the “right” loan between the two?
Which Loan Program Is Better?
Here is a simple way to choose the right loan program between the two if you are buying the home as your primary residence:
- Is the home owned by Fannie Mae? If yes, it probably makes the most sense to get a HomePath Renovation loan.
- Is the home owned by someone other than Fannie Mae? If so, then your best option is the FHA 203k loan.
While both the FHA 203k loan and the Fannie Mae HomePath Renovation loan programs are similar, I have found that for houses owned by Fannie Mae it usually makes more sense to go with the HomePath Renovation loan.
Which means the first question you may want to ask is:
Is this house owned by Fannie Mae?
And then you will have your answer.
Justin McHood works for Academy Mortgage and is based in Chandler, AZ. He is a contributor to Zillow Blog and has conversations about mortgages whenever he can. Learn more about Justin at http://www.mortgagecommentator.com.