Financing in 60624>Question Details

Kenneth, Home Buyer in Chicago, IL

APR on FHA 203k vs Conventional loans ? What factors go into figuring it out? How to shop for it.?

Asked by Kenneth, Chicago, IL Thu Jun 4, 2009

Is the APR higher on FHA vs conventional loans? Is the rahab portion of the 203k at a higher interest rate or is it one loan(rehab and purchase? On the mortgage professors web site he states that the APR for FHA is calculated differently than conventional loans leaving out some items and thus to compare "apples to apples" it must be recalculated to shop for a competitive loan. Is this true?

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Two little-known home renovation mortgage programs offer solutions for buyers and homeowners who want to renovate.

Fannie Mae and the Federal Housing Administration have home renovation mortgage programs that allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed. Homeowners can also use both programs to refinance their existing mortgage plus the renovation costs into one loan.

FHA's 203(k) program and Fannie's HomeStyle Renovation Mortgage have been around for years. In the old days, when most borrowers could easily get second mortgages or generous credit lines to pay for renovations, these loans weren't as appealing as they are today.

Home renovation loans in demand
"A couple years ago there wasn't as much demand for these loans," says Leesa Sandoval, a loan officer with PrimeLending in Dallas who specializes in renovation mortgages. "But now they are great to get some of this (housing) inventory sold and get these foreclosures out of the market."

More On Home Renovations:
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The FHA insured 22,491 home renovation mortgages in the 2010 fiscal year, according to the agency's latest report on 203(k) loans. That is more than six times the number of 203(k) loans the agency insured in 2007. Fannie says the volume of HomeStyle loans has picked up recently, but declined to provide details.

Dustan Shepherd, a loan officer and 203(k) specialist with BNC National Bank in Overland Park, Kan., says while demand for the rehab loans is up, many borrowers are not aware of the programs or think they are too complicated.
0 votes Thank Flag Link Mon May 4, 2015
Kenneth, you're obviously a number savvy guy but I would like to point out that you're asking us to compare apples to oranges.

A few questions/possible answers:

Are you trying to decide whether you're going to obtain a FHA renovation loan and comparing that loan and it's APR to a conventional loan that needs no work? That's what I took from your post, if so, I'm curious why it matters, you either need a rehab loan or you don't. If you have the cash and don't want to finance it into your loan and can close without needing a rehab loan, pay for it out of pocket. If you want to roll it in to the mortgage and keep your cash reserves, again the APR is moot because the decision isn't one loan vs another, it's cash reserves vs a larger financed amount (and therefore, larger payment).

If you're looking to compare a FHA renovation loan to a conventional renovation loan (we have this product), to decide which one makes more sense, you need to decide how much you want to put down. If you only want to put down 3.5%, you only have one option so APR is moot. If you want to put down 10% (currently this is the minimum for our owner occupied conventional renovation loan), you can do either loan program and the PMI will be roughly the same with the major difference that you're paying 1.75 points on the FHA version for the upfront mortgage insurance premium that is added to your loan, thus making your financed amount slightly higher, however there are advantages to doing the FHA version over the conventional one but those advantages are situational, you can contact me if you'd like to discuss your scenario further (my office is on North avenue) as I don't want to hijack your thread to talk about FHA vs Conventional pros/cons.

On a side note, I present quite often for Real Estate offices and occasionally, investor groups and APR is never a question that comes up, the things I pointed out are the common things that a consumer is trying to make a decision on. If you want to compare APR, compare identical products with different rate/costs

On a parting note, we'll talk about APR real quick: The APR hunt is only applicable if you never refinance your loan. I.E. If you have a loan with no closing costs @ say, 5.250% and another loan with a 5% rate and $2000 in closing costs (lets say, 5.15% APR in this example) but sell your home in eighteen months, you most likely wasted money getting the lower rate vs holding your home for ten years. Focus on what you really need (cash in the bank or lower payment / rehab loan or home in good shape / condo or single family / single family or multi-family / etc, etc, etc) and not so much on how books tell you to shop; your buying experience will be much more pleasurable.

My office is on North avenue and my contact info is in my bio if you want to setup an appointment.
Web Reference:
0 votes Thank Flag Link Thu Jun 4, 2009

I will assume you are the same Kenneth I just responded to earlier. If not, let me know and I can send you details on how the 203k loan works.

1. Depends. Again, I only focus on 203k loans so I don't know what the mortgage insurance premium is on conventional rehab loans over 80% LTV. However, on regular conventional loans vs. regular FHA loans the APR is usually higher on the conventional side, or at least since the credit crunch started.
2. On a 203k loan it is one loan combined. There is no separate rate or loan for the purchase and then another rate or loan for the rehab.
3. I don't know the website you are referring to. However if there is a conventional rehab loan (there was before the credit crunch, but I don't know if it exists anymore) get a Good Faith Estimate from a lender that does conventional rehab loans and compare it to a lender that does 203k loans. That is the best way to compare the two loans. The one with the lowest closing costs and the smallest payment (everything else being equal) obviously wins!

Kurt Clements
Senior Vice President
GSF Mortgage
3933 75th St
Aurora, IL 60504

Office: 630.806.7016
Cell: 630.430.1091
0 votes Thank Flag Link Thu Jun 4, 2009
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