Fannie Mae HomeStyle Loan vs. 203(k): What's the Difference?

It's about more than just the type of loan you’re getting

Close up of a father and daughter painting a chair in a house under construction
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Many homes on the market need some work. If you want to finance the purchase of a fixer-upper, you can choose from two main renovation mortgages: a Fannie Mae HomeStyle Loan and an FHA 203(k) loan. Both allow you to buy a home and pay for renovations with a single mortgage.

The main difference between the two is that a Fannie Mae HomeStyle Loan is a conventional mortgage, while an FHA 203(k) loan is a government-backed option with more lenient qualifying requirements. Learn more about how your renovation goals, timeline, and financial status can help you determine which is best for you.

What’s the Difference Between the Fannie Mae HomeStyle Loan and the FHA 203(k)?

Trying to decide between a Fannie Mae HomeStyle Loan and an FHA 203(k)? Here’s a look at the key differences between them.

  Fannie Mae HomeStyle Loan FHA 203(k)
Type of Loan Conventional Government-insured FHA
Qualifications  Minimum credit score of 620; 45% debt-to-income ratio Minimum credit score of 500; 31% front-end debt to income ratio and 43% back-end DTI
Type of Property You Can Finance 1-4 unit primary residence; 1 unit second home; 1 unit investment property 1-4 unit primary residence that is a single-family structure (must be owner-occupied)
Required Down Payment (Minimum) 5% of the total loan 3.5% of the total loan
Mortgage Insurance Required when putting less than 20% down; may remove after LTV ratio eligibility criterion is met  Required on all loans; may be for life of loan or 11 years, depending on LTV
Maximum Renovation Amount 75% of the as-completed value  Total value of the property must fall within the FHA local mortgage limits 
Types of Renovations Allowed Minor or major repairs that are permanently affixed to the property; must add value; luxury and landscaping items allowed Minor to major repairs that are permanently affixed to the property; no luxury items allowed; teardowns allowed 
Time Limit for Completion  15 months Typically 6 months

Type of Loan

Fannie Mae HomeStyle Loans are a type of conventional mortgage. Conversely, 203(k) loans are backed by the government. They’re a type of FHA loan

There are advantages and disadvantages to both types of loans. Typically, with the FHA loan, you can qualify with a lower credit score. Additionally, this type of loan allows for a lower down payment. 

However, conventional mortgages may not always require mortgage insurance if your down payment is large enough. And if your loan-to-value (LTV) ratio is below a certain amount, you can remove this coverage. This can help save money on your monthly payments. With a 203(k), your loan may always carry mortgage insurance if you put less than 10% down.

Qualifications

The qualifications for Fannie Mae HomeStyle Loans vs. 203(k) vary slightly. The FHA 203(k) has less stringent guidelines. Your credit score and debt-to-income ratio are two of the main factors that determine whether you qualify for a loan.

With a HomeStyle loan, you must have a credit score of at least 620. Additionally, your debt-to-income ratio (DTI) must be below 45%. This ratio is calculated by dividing your monthly debts by your monthly income.

For the 203(k) loan, you must have a credit score of at least 500. Both your front-end and back-end DTI are taken into account. Your front-end must be 31% or less and your back-end must be 43% or less. However, if you have significant compensating factors, such as verified cash reserves or residual income, a lower DTI may be allowed.

A credit score of 500 for a 203(k) loan only qualifies you for a 90% LTV. If you want to finance more than that, most lenders require a credit score of 580 or higher.

Type of Property You Can Finance

The FHA 203(k) has some restrictions as to the type of property you can purchase—there’s an owner-occupied requirement, for one. With these restrictions, you can renovate properties with between one and four units. But you must live in one of the units.

You can purchase single-family homes, structures with one- to four- single-family units, condominiums that are FHA approved, and manufactured homes. You can also purchase a mixed-used building if over half of the square footage is living space. 

The Fannie Mae HomeStyle Loan is more flexible. Like a 203(k), it can be used for owner-occupied primary residences. But you can also use this type of mortgage for a single-family second home or for a single-family investment property. The HomeStyle loan also allows for the purchase of structures with one- to four- single-family units, condominiums, co-ops, and manufactured homes.

Required Down Payment

Both renovation loans require a down payment. However, the government-backed FHA loan typically requires a lower one. If you go this route, you can put down as little as 3.5%.

The Fannie Mae HomeStyle Loan generally requires a down payment of between 5% and 25%. If you want to avoid mortgage insurance, you’ll need to put down at least 20%.

Maximum Renovation Amount

If the house you’re buying needs a lot of work, you’ll want to make sure you can take out enough to cover extensive repairs. With the HomeStyle loan, you can take out up to 75% of your home’s renovated value to put toward renovations.

If you’re fixing up a manufactured home using a HomeStyle loan, the limits are less. You’ll only be approved for up to 50% of the home’s as-completed value.

The 203(k) has a minimum renovation limit of $5,000. It doesn’t have a maximum renovation limit unless you choose a limited 203(k) loan with a $35,000 limit. With the standard option, your total property value must stay within the FHA mortgage limit for your local area.

To find your property’s value, your lender takes the lesser of two numbers: 

  • The value of your property before you do any work, plus the amount of money you put into renovations
  • 110% of your property’s appraised value after the renovations are complete

A 203(k) loan allows you to finance living expenses for up to six months if your home is considered unlivable without the changes.

Types of Renovations Allowed

An FHA 203(k) loan and a Fannie Mae HomeStyle Loan have different rules for the type of renovation costs they cover.

If you need to completely start over, the 203(k) allows you to take the home down to its foundation and rebuild from there if it’s proven that the foundation can handle the new build. A HomeStyle loan doesn't cover these types of home teardowns, only repairs.

Overall, the 203(k) is a bit more restrictive when it comes to repairs. This loan only allows for repairs that fall into specific categories. These include health and safety issues, energy-efficiency upgrades, and necessary repairs to make the home livable.

The HomeStyle loan from Fannie Mae is more flexible. You can use this loan to finance any type of repair as long as it’s permanently attached to the property and adds to the value of the home. You're even allowed to put in landscaping and luxury items such as a swimming pool or a tennis court. These luxuries wouldn’t be covered under a 203(k), though landscaping may be.

Time Limit for Renovation Completion 

To help ensure your renovation project stays on track, both types of loans have completion deadlines. Once you close the loan, the time starts ticking. You must start the repairs within 30 days for both loans.

With the 203(k) loan, you only have six months to get everything done. The Fannie Mae loan allows up to 15 months for the renovations to be completed, giving you more time for construction.

Which Is Right for You? 

If you're planning on financing a house that needs repairs, the HomeStyle or 203(k) renovation loans can help. Here is some more information about each to help you decide which is right for you. 

The Fannie Mae HomeStyle loan is a good choice if you: 

  • Have a higher credit score 
  • Can qualify for a conventional mortgage
  • Have some extra money saved for the larger down payment
  • Want to finance a second home or investment property
  • Dream of adding luxury upgrades to your home, such as a swimming pool or BBQ pit

The FHA 203(k) loan may be a better option if you: 

  • Have a lower credit score
  • Don’t have much money saved for a down payment
  • Need to completely tear down your home and start over on the existing foundation
  • Plan on living in the home you’re rehabbing

The Bottom Line

If you’re trying to decide between the Fannie Mae HomeStyle Loans and the 203(k), know that both loans can help you turn your home into the house of your dreams. It comes down to the type of repairs you need to do and how much money you have for a down payment. 

The 203(k) is a great choice if your repairs are health- and safety-related, or if they fall into specific categories that are approved by the FHA. The HomeStyle loan is a good choice if you need more flexibility. This loan also has a longer completion timeline, which is helpful when flexibility is important. 

No matter which option you choose, there is a way to purchase a home and make the necessary repairs without having to take out a second mortgage.

Article Sources

  1. U.S. Department of Housing and Urban Development. “Mortgagee Letter 2013-04.”

  2. FDIC. “HomeStyle Renovation Mortgage.”

  3. FDIC. “​​203(k) Rehabilitation Mortgage Insurance.”

  4. FDIC. “​​203(k) Rehabilitation Mortgage Insurance.,” Pages 2-3.

  5. FDIC. “​​203(k) Rehabilitation Mortgage Insurance.,” Page 3.

  6. FDIC. “HomeStyle Renovation Mortgage,” Page 2.

  7. American Capital Financial Group. “Fannie Mae's HomeStyle Renovation Loan.”

  8. U.S. Department of Housing and Urban Development. “The Section 203(k) Loan Program,” Page 2.

  9. FDIC. “HomeStyle Renovation Mortgage,” Page 3.

  10. American Financial Resources. “What Is the FHA Limited 203(k) Renovation Loan?”

  11. GMFS Partners. “TPO Fannie Mae HomeStyle Renovation Product,” Page 3.

  12. Fannie Mae. “Selling Guide Announcement (SEL-2022-01) Feb. 2, 2022,” Page 2.