Fixer-Upper Loans in Durango: FHA 203(k) vs. Fannie Mae HomeStyle

You can buy a home that needs work and finance the repairs in the same mortgage. In Durango and the rest of Southwest Colorado, the two loans I use most for this are the FHA 203(k) and Fannie Mae HomeStyle. Both are based on what the home will be worth after the work is done, not just what it’s worth today.

That matters here. A lot of homes in La Plata County have good bones and a great location but need a roof, a new furnace, a kitchen from this century or work on the well and septic. Instead of paying cash for repairs after closing, or passing on the house, a renovation loan rolls the purchase and the work into one loan with one closing.

How does a renovation loan work?

You get written bids from a licensed contractor before closing. The appraiser values the home “as completed,” meaning the way it will look when the work is finished. At closing, the repair money goes into an escrow account along with a contingency reserve for surprises. Your contractor is paid in stages as the work gets done and inspected. If the reserve isn’t used, it goes toward your loan balance.

The loan is sized from the smaller of two numbers: your total costs (price plus repairs, reserve and financed fees) or the value after the work, up to the county loan limit. The renovation loan calculator shows which one sets your number.

What is an FHA 203(k) loan?

The FHA 203(k) is for a home you’ll live in, from 1 to 4 units. FHA’s credit rules are more flexible than conventional loans, which makes it a good fit for many first-time buyers. It comes in two types:

• Limited 203(k): repairs up to $75,000 that aren’t structural, such as kitchens, baths, flooring, paint, a roof, windows or a furnace. No consultant is needed, and the work has 9 months to finish.
• Standard 203(k): bigger projects, including structural repairs and additions. A HUD-approved 203(k) consultant writes up the work and inspects each stage, and the work has 12 months to finish. If you can’t live in the home during the work, mortgage payments for up to 12 months can be built into the loan.

FHA loans carry upfront and monthly mortgage insurance, and FHA doesn’t allow luxury items like a pool. See FHA loans in Durango for the rest of the FHA basics.

What is a Fannie Mae HomeStyle loan?

HomeStyle is a conventional renovation loan. It works for a home you’ll live in, a second home or a rental (1 unit), so it’s the option for a cabin or investment property that needs work. It allows almost any permanent improvement, including landscaping, a pool or an outdoor kitchen. There’s no upfront mortgage insurance, monthly mortgage insurance applies only until you have enough equity, and the work has 15 months to finish.

The trade-off: HomeStyle usually needs stronger credit than FHA. Some do-it-yourself work is allowed if it’s approved ahead of time, and the total renovation has a cap based on the home’s value.

FHA 203(k) or HomeStyle: which fits?

• You’ll live there and your credit is still building: FHA 203(k) is usually the place to start.
• It’s a second home or a rental: HomeStyle, since FHA is for homes you live in.
• The project includes a pool, landscaping or other upgrades: HomeStyle.
• Structural work or an addition on a home you’ll live in: either can work; we’ll compare both.
• You already own the home: a home equity loan or HELOC may be simpler and lets you keep your first mortgage.

I’ll run both side by side so you can see which costs less over the time you plan to own the home.

Fixer-uppers in Durango and Southwest Colorado: what to plan for

• Contractor timing. The building season in Durango, Bayfield and Pagosa Springs is short, and good contractors book up. Get bids early, ideally before you write an offer.
• Older homes. Homes built before 1978 may have lead-based paint, which calls for lead-safe work practices. Older homes also tend to need a bigger contingency reserve.
• Wells, septic and rural access. In the county, around Vallecito, Ignacio and out toward Cortez, repairs to a well, septic system or driveway can be part of the loan if they’re in the bids and the appraisal. My guide to buying a rural mountain home covers what to check.
• Cabins and second homes. A cabin near Purgatory that needs updates can’t use FHA, but it may fit HomeStyle.
• Loan limits by county. FHA and conforming loan limits differ between La Plata, Archuleta and Montezuma counties, which can change which loan works for a higher-priced home.

Questions people ask me

Can I live somewhere else while the work is done?

Yes. Mortgage payments can be built into the loan while the home is unlivable: up to 12 months with a Standard 203(k), or up to 6 months with HomeStyle on a home you’ll live in.

Can I do the work myself?

With FHA, generally no. HomeStyle allows some do-it-yourself work if it’s approved ahead of time. Ask me before you count on it.

Do I need a contractor lined up before I make an offer?

Not before the offer, but soon after. The loan is built on written bids, so the sooner you have them, the smoother the appraisal and closing go.

What if the repairs cost less than the bids?

Money left in the repair or contingency account goes toward your loan balance once the work is finished.

Ready to look at a fixer-upper?

Call or text me at 970-828-1610 and I’ll call you back the same day. Tell me about the home and the work, and I’ll tell you honestly whether a 203(k), HomeStyle or something else fits. You can also run your own numbers with the renovation loan calculator, read more on my renovation loans page, see what price range fits you with the home price range tool, or learn why buyers work with a local Durango mortgage lender.

Peter Pritchard

Sources: HUD, 203(k) Rehabilitation Mortgage Insurance program and Mortgagee Letter 2024-13; Fannie Mae Selling Guide B5-3.2-02 and B5-3.2-04 (HomeStyle Renovation).