FHA 203 (k) vs. Conventional Renovation Loans: A Comprehensive Comparison

As home prices continue to rise in 2025, it's more important than ever to understand your options for remodeling and renovating existing properties. Familiarizing yourself with renovation loans can empower you to make informed decisions for your home improvement projects. 

Renovation loans enable homeowners to finance the costs associated with repairs and renovations on existing properties. While X2 Mortgage offers financing for a variety of construction loans, and Equity loans, it's important to note that Renovation loans are not intended for new construction projects. Renovation loans can be used on existing residential properties by either purchasing and rehabilitating the structures, or refinancing and then rehabilitating those structures.

There are five types of renovation loans, but in this specific blog, we will discuss the two most popular: The FHA 203(k) Loan and the Conventional Renovation loans, HomeStyle Renovation Loans, and Choice Renovation Loans.

This loan is insured by the Federal Housing Association and is a very popular renovation loan for good reason. This loan is for the right borrower, who loves to do DIY Projects and get involved in the building or development of their home. 

 

 

FHA 203(k) Loans 

The FHA 203(k) loan is a popular renovation loan insured by the Federal Housing Administration, ideal for borrowers who enjoy DIY projects and want to be involved in home improvement. It offers flexibility with credit score and debt-to-income (DTI) requirements, allowing qualifications with a minimum credit score of 500 and a DTI of up to 57%. The property must be at least one year old and used as a primary residence, distinguishing it from construction or investment loans. This loan can cover various renovation costs, including reconstruction, repairs, engineering fees, permanent inspection fees, and consultant fees.

The FHA 203K loans are categorized in two parts, Standard vs. Limited.

 

The Standard 203(k) Loan: Standard loans are used for major remodeling projects, with a minimum requirement of 5,000 and no max repair cost requirements. Standard loans require the use of a 203 (k) consultant guide. 

 

What is a 230(K) consultant? A 203(k) consultant is an approved loan specialist certified to assist borrowers with planning and renovations. Acting as a liaison between the homeowner, contractors, and lender, the consultant ensures that all work complies with FHA requirements. They inspect the property and prepare detailed write-ups, cost estimates, and change orders.

 

Eligible improvements covered by standard loans include:

- Converting a single-family structure into a multi-family dwelling

- Reconstructing properties that have been demolished, provided the foundation remains intact

- Installing or repairing wells and septic systems

- Repairing or replacing plumbing, heating, air conditioning, and electrical systems

- Making aesthetic enhancements to the property

 

This consultant plays a crucial role in guiding the renovation process and ensuring adherence to regulations.

 

The Limited 203(k) Loan: The Limited 203(k) loan is designed for minor remodeling and non-structural repairs. There is no minimum rehabilitation cost, but the maximum is capped at $35,000. Typically, the work should be completed within 15 days. A consultant is not required, though it remains an option depending on your level of expertise, and can be financed into the loan.

 

Examples of eligible improvements under the Limited 203(k) include:

- Repairing or installing new roofing

- Siding and gutters

- Energy conservation improvements

- Preparing the driveway

- Repairing or removing an existing inground swimming pool

 

Contingency Reserves / Mortgage Payment Reserves

Contingency reserves and mortgage payment reserves serve as financial backups. Mortgage payment reserves are funds included in your loan to cover mortgage payments while the borrower undergoes major renovations and is not residing in the home. 

It’s worth noting that renovation projects rarely go exactly as planned. Contingency reserves are funds set aside to cover unforeseen project costs and are also financeable under the 203(k) loan, typically up to 20% of the project's repair and improvement costs. The exact percentage depends on the age of the structure and any termite damage.

 

Self-Help Agreements / Financeable Fees

Self-help agreements allow borrowers to perform their own work, catering to those who enjoy DIY projects. However, if a job is to be completed by a licensed contractor, the work cannot be in question. Borrowers can be licensed contractors themselves, but they must follow a specific set of guidelines.

For those who decide to undertake their renovation projects, they must sign a rehabilitation self-help agreement. This agreement signifies that they have the time, skills, tools, and determination to complete all work items professionally. It's important to remember that while materials can be paid for under the loan, borrowers cannot pay themselves for labor.

 

The FHA 203(k) loans involve three stages: the origination stage, the repair and improvement stage, and the project completion stage.

 

Stage 1: Origination Stage

In the first stage, the borrower either owns or identifies a property that requires renovation. They then find an FHA-approved lender, such as X2 Mortgage, and complete the necessary steps to qualify for the loan. Depending on the type of project, the borrower may engage a consultant or create a work write-up and cost estimate themselves to submit to the lender. The lender processes, underwrites, and closes the loan. The borrower must then wait for the FHA to ensure the loan before beginning home improvements.

 

Stage 2: Repair and Improvement Stage

The second stage is known as the repair and improvement stage. The contractor (for standard loans) or the borrower (for limited loans) obtains the necessary permits to start the project and completes the initial phase of the work. Once the work is finished, an inspection is required to release funds for payment. This inspection ensures that the work meets FHA standards. The contractor and borrower sign the draw release and submit it to the lender for payment. The lender then issues a check, and this process continues until the project is completed.

 

Stage 3: Project Completion Stage

In the final stage, the borrower provides a release letter confirming that all work is complete. The consultant verifies the work and obtains a certificate if necessary. All remaining escrow funds are then released, and the lender officially closes out the project behind the scenes.

 

Example Scenario:

Lucy found a home she loves, but when the inspection came back, there was a huge issue with the roof, which affected the livability of the home. There are issues with the pool and even the driveway, and she wants some new carpet and painted walls. Little did Lucy know this house was a fixer-upper! The sellers did not want to cover it, so Lucy had a choice–to cancel the contract and go back to the drawing board, or explore the option of a renovation loan. 

Upon further exploration of her credit and DTI, Lucy decided to go with a Standard 203 (k) loan. Under this loan, she has to hire a consultant, but she's not worried as that cost can be financed into her loan–and roofing is not in her expertise! Between the roof and painting, that's going to take at least a month. At first, she was concerned about not being able to live in our house for the first month, but then she remembered that mortgage payment was also factored into her loan. 

Since Lucy's dad growing up was a contractor, she understands that renovations can often have unexpected costs. She's not afraid to get her hands dirty and is in constant communication with her contractor to make sure that everything is going to plan. Her favorite part? She gets to choose the aesthetics of her pool and doesn't have to worry about any costs coming out of her pocket in case something else is needed, with the reserve contingencies she financed with her loan officer. The result? One happy homeowner, with a great home in a great location. 

 

Comparison of Fannie Mae HomeStyle Renovation Loans and FHA 203(k) Loans

 

Fannie Mae HomeStyle Renovation Loans / Choice Renovation Loans**

HomeStyle renovation loans fall under the conventional loan sector, offering borrowers greater flexibility in renovation terms compared to FHA loans. Here are some key points:

 

Project Flexibility: Unlike FHA 203(k) loans, which require projects to be explicitly listed and categorized, HomeStyle loans allow for a wider range of renovations as long as the existing foundation is used. This means borrowers can pursue various improvements without strict limitations.

 

Cost Requirements: There are no minimum or maximum cost requirements for HomeStyle loans, unlike the 203(k), which has defined limits. For both purchases and refinances, the total loan amount can be up to 75% of either the purchase price plus renovation costs or the “as-completed” appraised value, whichever is lower.

 

Contractor Flexibility: Borrowers have the freedom to choose any licensed contractor, as long as they meet state licensing requirements. During the completion stage, contractors simply submit a form called the 1004D to report project completion.

 

Process Similarities: The stages of the HomeStyle renovation process are similar to those of the FHA loan, with some nuances allowing for more freedom, particularly regarding draws. After the pre-approval stage, the lender assesses whether improvement funds need to be escrowed or if a contingency reserve is necessary, and then deposited into an account.  Following closing, the lender services the loan, managing project draws and overseeing the renovation process.

 

Additional Considerations

Interest Rates: Typically, conventional HomeStyle loans may offer competitive interest rates compared to FHA loans, depending on the borrower’s creditworthiness.

Private Mortgage Insurance (PMI): HomeStyle loans may require PMI if the down payment is less than 20%, whereas FHA loans have their insurance requirements.

Property Type: HomeStyle loans can be used for a wider variety of property types, including investment properties, whereas FHA loans are more restrictive in this regard.

This comparison highlights the advantages of HomeStyle renovation loans for borrowers seeking more flexibility and fewer restrictions in their renovation projects.

 

 

Example Scenario: 

Lucas inherited his parents’ house when they passed away last year. They had owned the home for a long time, and it needed some major repairs. Lucas had never had a home before, and was pretty hands-on when it came to fixing things. With a credit score of 800, a low DTI of 29%, and an LTV of 30%, Lucas qualified for a Homestyle Renovation Loan. When Lucas refinanced, he had the House appraised.  Everything fell into place for him to remove a few walls in the main living areas and add two rooms at the back of the house, providing his future kids with their own spaces. The lender handled the project draws and supervised the renovation, and after the final appraisal, Lucus couldn't be more satisfied with the entire experience.

 

Conclusion

As home prices are expected to continue to climb in 2025, understanding your options for remodeling and renovating becomes increasingly critical. Renovation loans, such as the FHA 203(k) and HomeStyle Renovation Loans, provide homeowners with the financial tools necessary to transform existing properties into dream homes. With the ability to finance repairs and improvements, these loans not only enhance your living space but also protect your investment in a fluctuating market.

 

If you’re considering a renovation project, now is the perfect time to explore your financing options. Contact X2 Mortgage today to learn more about how renovation loans can work for you. Whether you’re ready to dive into a DIY project or prefer the guidance of a professional, we’re here to help you make your home improvement dreams a reality.