Every so often, a home buyer finds a home that they know in their hearts would be perfect for them, if not for some costly repairs they would need to make in order to bring the property up to habitable standards. Sometimes, renovation is the only thing standing between a house and a dream home. Buying a fixer-upper can save a home buyer tons, but sourcing the money to do the necessary work can be incredibly difficult.
The pain isn’t only felt by home buyers either. Homeowners who have put in some time in their homes, but are dying to renovate have it just as hard. Sometimes homeowners find themselves in the perfect home, minus that awful kitchen from the 50s.
Of course, for a homeowner, there are a few well-known options on the market for when they need to renovate their homes, like home equity loans and home equity lines of credit. Still, utilizing equity, while helpful, can be slightly troublesome at times. In either case, having another option that allows home buyers and homeowners alike the chance to rehab or renovate a home that they wish to buy or already own couldn’t possibly hurt, right?
That’s exactly why the FHA 203(K) loan has become as popular as it is today. The FHA’s answer to the rehabilitation/renovation problem allows borrowers to obtain or refinance a mortgage with additional proceeds added to handle the costs of renovations or repairs. While it’s hard to deny the awesome benefits of FHA loans, some home buyers would still love to have an option that doesn’t include mandatory mortgage insurance payments and a few of the other drawbacks that stem from FHA-insured financing.
For those home buyers and homeowners, luckily, there’s a conventional solution. The Fannie Mae HomeStyle lineup of mortgage products is an incredibly competitive alternative to FHA insured loans. In particular, the HomeStyle Renovation loan is the conventional alternative to the FHA 203(K) loan, in that it provides homeowners and home buyers a financing option that allows for renovations and repairs to be made to a property, all while remaining affordable and easy to qualify for.
What is the Fannie Mae HomeStyle Renovation Loan?
The Fannie Mae HomeStyle renovation loan was created to provide an economical and convenient way for home buyers, homeowners, and even investors to finance rehabilitation and/or renovation through a first mortgage or refinance. The HomeStyle Renovation loan eliminates a homeowner’s need to have to qualify for, apply for, and close a second mortgage. It also does away with the cumbersome double loans that home buyers often have to deal with when purchasing a fixer-upper. To do this, it finances the cost to purchase a home with the cost to repair the home, all into one neat package.
HomeStyle Renovation loans allow for a single-closing alternative to a very common renovation and rehabilitation problem. Instead of having to take out a second mortgage such as a home equity loan, or home equity line of credit, home buyers and homeowners can accomplish the same work that needs to be done, all while utilizing a first mortgage on the property. No second mortgage means only having one monthly mortgage payment to worry about while still being able to make the necessary repairs that a home needs.
Fannie Mae’s HomeStyle Renovation loan allows borrowers to finance not only a home purchase or refinance, but the costs of repairs and renovations, all in one loan. Borrowers may utilize up to 75% of the lesser between the as-completed (after rehabilitation/renovation) appraised value of the home or the purchase price of the home plus rehabilitation /renovation costs. There are no restrictions as to the type of improvements that can be made to the property, so long as they can be completed within six months of the loan’s origination.
HomeStyle Renovation Loans come with all of the same benefits of the HomeStyle and HomeReady mortgage programs, including the flexible eligibility requirements. Home Buyers can put as little as 5% down with the standard loan, or 3% when combined with the HomeReady package, providing they pay private mortgage insurance, which they can cancel once they have built up at least 20% equity in their home.
How the HomeStyle Renovation Loan Works
Home buyers and homeowners can find a convenient renovation solution with the HomeStyle renovation loan. Unlike with its competitor, the FHA 203(k) loan, there are no real limits on what is allowed to be renovated or repaired with the proceeds from a HomeStyle renovation loan. Borrowers will, however, need a licensed contractor to provide detailed plans and proposals for the work that is to be done to the property.
The HomeStyle Renovation loan can be used for any manner of renovation including (but not limited to) design improvements, updating an older home, adding new features to the structure, and even constructing additional living spaces like a basement apartment or an in-law suite. In many cases, work done with the HomeStyle mortgage loan rapidly adds equity to a property, a huge benefit for any homeowner. Handy home buyers can even finance some do-it-yourself work, providing it doesn’t account for more than 10% of the home’s as-completed value.
Funding from the HomeStyle loan is typically disbursed as work is completed, after being inspected. Even so, it is possible for some money to be disbursed upfront in order to cover certain costs pertaining to the renovation, such as fees for pulling any required permits.
The HomeStyle renovation mortgage is packaged as either a 15-year loan, a 30-year loan, or a 5/1 adjustable-rate mortgage. Eligible first-time home buyers may put as little as 3% towards a down payment. The cancelable private mortgage insurance that’s required for down payments under the standard 20% is also known to be less costly than FHA mortgage insurance and has no upfront premium.
Eligible Properties for the HomeStyle Renovation Loan
The HomeStyle Renovation loan can be used to purchase and renovate any of the following types of homes:
1-unit residence (up to 95% LTV, 90% with an ARM)
2-unit residence (up to 85% LTV, 75% with an ARM)
3 and 4 unit residence (up to 75% LTV, 65% with an ARM)
1 unit (as a 2nd home) (up to 90% LTV, 80% with an ARM)
Down Payments for the HomeStyle Renovation Loan
The Fannie Mae HomeStyle Renovation loan has a satisfyingly low down payment requirement of only 5%. First time home buyers may take an extra 2% off of that amount, leaving only 3% left to be paid. In addition, the down payment amount can also be lowered to 3% by combining the loan with the HomeReady program.
While strictly adhering to most other conventional loan guidelines, HomeStyle renovation loans do differ when it comes to calculating the value of the property. In lieu of the traditional appraisal method, the HomeStyle loan bases its down payments and funding off of the as-completed or “after repaired” value (ARV). This amount represents the value of the property after all of the repairs have been made, as calculated using the plans submitted by a licensed contractor.
Some borrowers may be eligible to borrow up to 105% of the home’s ARV, through subordinate financing from Community Seconds. This federal program is reserved for home buyers making a purchase on a primary residence. For eligible borrowers who qualify, no down payment is needed.
Benefits of the HomeStyle Renovation Loan
The Fannie Mae HomeStyle Renovation loan could be the perfect solution for home buyers and homeowners who need to make some repairs to a property. The loan is jam-packed with benefits, making it a no-brainer in most cases. That’s even when compared to its FHA counterpart, the 203(k) loan!
The Homestyle Renovation loan starts strong by eliminating the need to sit through two closings or take out a second mortgage to get work done on your home. Borrowers are only responsible for one monthly payment, with one interest rate, rather than two separate payments with two separate interest rates. This allows an easier home purchase for home buyers looking to purchase a fixer-upper, but who find themselves a bit strapped for cash.
HomeStyle renovation loans are available with down payments as low as 5%, for the repeat home buyer, and even lower for first time home buyers and borrowers who bundle the loan with the HomeReady program. There is private mortgage insurance that must be paid, but it can be canceled as soon as the borrower accumulates 20% equity in the property.
Speaking of equity, renovations to the property can rapidly increase a property’s equity upon completion. The loan may also be combined with the HomeStyle Energy loan to make energy efficiency upgrades, which not only highly boosts equity but can also save the homeowner a bunch of money in the long run.
There are no limits to what can be done through homestyle renovation, so homeowners and home buyers can truly make a house feel like a home, or completely transform it into a dream home. Upfront draws can also be made available in order to get the work started sooner, in order to reduce out-of-pocket expenses for the borrower.
The loan is available to investors, unlike many loans of this nature. In addition, it can be used for the purchase of multiple unit properties where the owner occupies one unit and rents out the rest, a great option for homeowners with a more income-oriented goal in mind.
Drawbacks of the Fannie Mae HomeStyle Loan
While the HomeStyle loan does sound like an amazing option from almost every angle, there are a few things worth considering. For starters, the loan is still a conventional loan, and therefore it can have some strict eligibility requirements to contend with. For example, unlike the FHA 203(k) loan that accepts borrowers with credit scores as low as 580, the HomeStyle loan typically isn’t available to borrowers with a score lower than 640.
HomeStyle loans are not meant to be utilized to demolish and reconstruct a property, only to rehabilitate or renovate an existing property. In order for the loan to close, borrowers must first find eligible contractors and have them submit plans and proposals to be approved. This can greatly extend the time it takes for the loan to close.
Additionally, as per the guidelines of the program, the loan requires that home inspectors look at the home, create the project plan and periodically inspect the home while the work is being completed. This has been known to stall the project in some cases. Home buyers looking to move quickly could see many potential hold-ups when considering a HomeStyle Renovation loan.
Only a few lenders are approved by Fannie Mae to originate HomeStyle renovation loans, so it could take a while for home buyers to locate an approved lender. Borrowers are also responsible for paying private mortgage insurance on the loan for any down payment under 20%. As we mentioned earlier, all renovations must be completed within 6 months of closing the loan.
HomeStyle Renovation Loan Eligibility Requirements
The Fannie Mae HomeStyle Renovation loan generally follows conventional underwriting standards. Borrowers must fit somewhat strict eligibility criteria in order to benefit from the loan. The criteria for HomeStyle Renovation loans includes:
Loan-to-Value - Up to 97% of the property’s After repaired value (depending on the type of property)
Debt-to-Income ratio - May not exceed 43%
Credit Score - No less than 620
Property - Must be one of the following
1-4 unit primary residence
1 unit second home
1 unit investment property
An approved manufactured home
Renovation funds for manufactured homes are capped at the lesser of $50,000 or 50% of the “as-completed” appraised value.
An approved unit in an eligible co-op project or condo.
Must be able to provide proof of income
Eligible Borrowers include
Individual Home buyers (owner-occupants)
Must be able to provide documentation that proves their ability to repay the loan
Borrower must choose their own contractor
The contractor must agree to “construction contract”
The contractor must also be vetted by the lender and be approved
Plans for the project are to be submitted by a registered, licensed or certified general contractor, renovation consultant, or architect before the scheduled closing of the loan
Any “Do-it-yourself” work done cannot exceed 10% of the completed value of the property
Renovation funds may not exceed 75% of the lesser of the “as-completed” appraised value of the home or the sum of the purchase price of the home plus renovation costs.
Who is the ideal borrower for the HomeStyle Renovation Loan?
Any home buyer or homeowner who needs renovations done on a property should at least consider the HomeStyle renovation loan. Home buyers who aren't afraid of a fixer-upper are the ideal candidates. For homeowners looking to refinance their mortgage to something with affordable rates and still get some well-needed repairs in, there may be no better option available.
The HomeStyle renovation loan is the perfect alternative to a second mortgage. Borrowers looking to avoid closing a second loan, or the exorbitant interest rates on a home equity loan may prefer a loan with a single monthly payment that not only covers the cost of the home, but any necessary repairs and renovations as well. Plus, if you’re buying a home that needs rehabilitation, this loan can save you both time and money, making your home purchase all that easier.
The ideal borrower must also be able to qualify for conventional financing and must be able to meet all of the loan’s eligibility requirements. This includes being able to find an approved contractor and limiting the amount of “do-it-yourself” work done on the property. Luckily, there is no strict need for a down payment of 20% (like with most conventional financing options) as a 5% down payment is all that is required!
Fannie Mae HomeStyle Renovation Loans: In Review
For you’re purchasing a home in need of repairs, or you’re a homeowner who knows they could improve the condition of the home they are in, the HomeStyle renovation loan is a fantastic option. If you know that you could completely transform a house into a dream home, if only you had the funding to do so, the HomeStyle renovation loan is for you. For borrowers who cannot qualify for, or simply don’t want the trouble of dealing with a second mortgage, the HomeStyle renovation loan is also a great choice.
Buying and renovating a home used to take two separate loans, or an FHA 203(k) loan, until the HomeStyle renovation loan dropped onto the scene. Although it may have more strict eligibility requirements than its FHA counterpart, the HomeStyle renovation loan has no limits as to what can be done to renovate a property. It even has admirably low rates and a 5% down payment requirement.
All in all, the HomeStyle renovation loan is an amazing home loan option for either purchasing or refinancing a home that could use some love. If you think a HomeStyle renovation loan is the mortgage solution you’ve been looking for and would like to find out more, reach out to home.loans today and speak with a one of our friendly mortgage specialists!