Comparing one mortgage loan option to another is a bit like comparing apples to oranges. They're both fruit (or home loans) but they're still a bit different. If you're looking to compare the 203k loan vs conventional mortgage options, then you're likely already familiar with how the FHA 203k helps home buyers finance remodeling and renovations. So instead of answering the question "What is the FHA 203k?" we'll dive right into the difference between this home improvement loan and a more traditional route, a conventional mortgage.
Pros and Cons
Since the 203k loan helps you finance the remodeling projects you're looking to do right into one mortgage, you already know one difference. A conventional mortgage only pays for the purchase of a property. Conventional doesn't pay for renovations. In order for you to pay fo that work, you'll need to have the cash on hand or take out another loan.
If you take out another loan on top of your conventional mortgage, you're probably looking at a home equity line of credit - HELOC - which acts as a second mortgage. You could also save up the cash or use a credit card. All of these additions to your house payment mean you're paying different interest rates and different bills. The 203k loan would roll of those costs directly into the same house payment with the same interest rate.
With a conventional mortgage you could likely avoid the need to pay mortgage insurance. The 203k loan doesn't have that option since it's a 3.5% down payment option. Not paying mortgage insurance could save you money each month. You have to ask yourself the question if that cash saved is more than what you'd pay in interest on a credit card or a second mortgage (HELOC).
The 203k loan lets you as the buyer or homeowner finance a contractor to do the work. In fact it's a requirement for almost all of the work involved. There are a few do it yourself projects you could finance, but the DIY procedures on FHA 203k loans are pretty strict. So if you'd rather pay a pro to build and remodel, then you'd likely consider the 203k. If you'd rather put the time and effort in yourself for a little "sweat equity," then you'll want to find an alternative to the 203k loan - like a conventional mortgage.
Before and After
One way to compare the two options is to check out a before and after 203k loan story. You may know some of the eligible work like new siding or replacement windows, but you may not realize some of the work covered could include interior design and decorating. Looking at pictures can help put the benefits into focus.
Your credit history may also play a role in the 203k loan vs conventional mortgage decision. Because it's an FHA loan and it involves more risk - home improvement loans and paying for remodeling can come with added risk to lenders - credit score requirements may be a bit more strict than conventional. Plus, you'd likely have a larger down payment for a conventional mortgage so your credit score requirements may differ.
When looking at a comparison of conventional mortgage vs 203k loan, it's important to know your goals. Talking to a mortgage consultant who's an expert 203k lender can help you focus on reaching your goals with the right mortgage loan option.