My home needs to be renovated but I have little equity. What are my options?

Q: I own two properties free and clear that need renovating. There is not much equity in either house. What's my best option?

A: Even with limited equity available, you have a couple of options to pursue:

Option 1: FHA 203k

The FHA backs a program called FHA 203k, which is a home rehabilitation mortgage. In essence, you come to a lender with a set of plans for upgrades and improvements to the property, and an appraisal estimates the value of the home after the improvements have been completed. You can usually finance up to about 96.5 percent of the final value.

Option 2: Streamline FHA 203k

If the cost of the expected improvements is less than $35,000, the FHA offers a "streamlined" version of the 203k loan, and you can generally occupy the home while the upgrades are being made. The "full" 203k is intended for major structural changes/repairs -- expansions, replacing plumbing, etc., that would render the home uninhabitable until the process is complete.

The drawback to any FHA program is that mortgage insurance is not only required, but is it non-cancelable for as long as you own the home.

Option 3: Fannie Mae's HomeStyle Renovation mortgage

Another option would be Fannie Mae's HomeStyle Renovation mortgage. It essentially works in the same manner as the FHA 203k. Fannie Mae notes that their "HSR mortgage provides a convenient way for borrowers to make renovations, repairs, or improvements totaling up to 50 percent of the as-completed appraised value of the property with a first mortgage, rather than a second mortgage, home equity line of credit, or other, more costly financing method. Eligible borrowers include individual home buyers, investors, nonprofit organizations, and local government agencies."

 You can usually finance up to 95 percent of the final improved value of the home. Of course, there will also be private mortgage insurance required here as well, but it can be canceled at some point in the future when your equity stake exceeds 20 percent.

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Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President,
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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