Complete Guide to HomeStyle Renovation Mortgage
June 2018 - By Holly Johnson
Imagine you find your dream home for sale on the perfect piece of land. The problem: It needs some serious work.
You run the numbers to see just how much it might cost to fix it up. Unfortunately, you find you only have enough cash to cover closing costs and a down payment — not enough to buy the home and pay for renovations.
What do you do in this case? If you wait to save up the money to pay for a remodel in cash, you will likely lose the property to another buyer. Put the renovations on a credit card, and you could face big interest charges and an increase in unsecured debt. You could try for a second mortgage after you buy the property, but there is no guarantee you would qualify or get the cash you need.
One solution to consider is a Fannie Mae Homestyle® Renovation Mortgage. This type of mortgage lets you borrow the money for renovation and repairs with a conventional first mortgage instead of leaving you to finance renovations on your own.
What is the Fannie Mae HomeStyle® Renovation Mortgage and what does it cover?
The Fannie Mae HomeStyle® Renovation Mortgage was created to help consumers purchase homes that need work from the very beginning. With this type of mortgage, buyers can bundle the costs of purchasing a home with the expense of remodeling and make a single monthly mortgage payment. HomeStyle mortgages also aim to help lenders cope with “constrained housing supply and evolving borrower needs,” since they allow buyers to purchase homes they may not be able to buy without additional financial help.
The best part is, the Fannie Mae Homestyle® Renovation Mortgage can be used on any type of renovation project, provided the improvement is permanently affixed to the property. It can even be used to help lenders save deals that may otherwise fall apart due to repair contingencies. However, Fannie Mae notes that renovations should be completed within 12 months of loan origination, which means you can’t borrow the money if you’re unsure whether you want to renovate.
What are the eligibility requirements?
While the HomeStyle mortgage can be used for any type of renovation, the borrower and the property must meet certain requirements.
The main eligibility requirements for Fannie Mae HomeStyle® Renovation Mortgages include:
Loan-to-value ratio limits
The maximum loan-to-value (LTV) ratio on a HomeStyle mortgage varies by property type, but it’s typically 97% for a one-unit, principal residence with a fixed-rate mortgage. The LTV maximum for two-unit principal residences is 85%, 75% for three- and four-unit principal residences, and 90% for one-unit second homes. For refinances, the loan-to-value is determined by dividing the total loan amount by the “as completed” appraised value of the property.
In certain cases, borrowers who apply for a HomeStyle mortgage may be able to borrow up to 105% of the property’s final value with subordinate financing from Community Seconds, a special program that must be administered through federal agencies, a municipality, state, county, state or local housing finance agency, a nonprofit community agency, or Federal Home Loan Bank under one of its affordable housing programs. To qualify for Community Seconds, a property must be a principal residence. The loan program helps provide the necessary funds for all or part of the down payment along with closing costs and renovation costs.
Borrowers need to come up with a down payment related to their loan-to-value ratio. For a one-unit, principal residence with a loan-to-value ratio of 97%, they would need to put 3% of the completed value of their home down upfront, for example.
Credit and debt qualifications
Borrowers need to meet standard eligibility requirements for a traditional mortgage, including a minimum credit score of 620 and proof of income. Many lenders may not approve you if your debt-to-income ratio (including your new home loan costs) is higher than 43%.
Borrowers must choose their own contractor and have a “construction contract” with their contractor in place. The contractor must also be vetted by the lender and approved based on their experience and qualifications.
All plans and specifications “must be prepared by a registered, licensed or certified general contractor, renovation consultant, or architect.”
Borrowers can do some “do-it-yourself” work on their property provided it is not a manufactured home, but that portion of the work cannot exceed 10% of the completed value of the property.
The limit on eligible renovation funds is 75% of the lesser of the “as-completed” appraised value or the sum of the purchase price and renovation costs.
Fannie Mae does not require properties to be habitable at the time of closing for this type of loan. If the property is not habitable, the borrower may also be able to finance up to six months of mortgage payments (including principal, interest, tax, and insurance payments) to cover these costs while they are unable to live there.
Manufactured housing is eligible with the HomeStyle mortgage, although eligible renovation funds are capped at the lesser of $50,000 or 50% of the “as-completed” appraised value.
Properties financed with a HomeStyle mortgage must be a one- to four-unit principal residence, a one-unit second home, a one-unit investment property, a manufactured home or a unit in an eligible planned unit development (PUD), condo or co-op project.
Advantages of a Fannie Mae HomeStyle® Renovation Mortgage
You can buy and renovate a home with one loan, which makes it easier for homeowners to buy a fixer-upper when they don’t have a lot of cash.
HomeStyle mortgages can also work for refinancing and may save you money if your current mortgage rate is high. With today’s low mortgage rates, you can not only save money on the existing debt if you are in a higher rate mortgage now, but you can get extra money to renovate or expand the home at a much better rate than if you used credit cards or vendor credit terms.
You have more housing inventory available to you. Instead of looking for a new home, you can start looking at some of the less desirable houses in the area you want to be in and use the renovation money to turn it into the home of your dreams.
As noted above, you can use these loans for investment properties or multi-unit properties where you plan to reside in one unit and rent out the rest.
Disadvantages of a Fannie Mae HomeStyle® Renovation Mortgage
These mortgages cannot be used to tear down and reconstruct a home. They can only be used to rehabilitate and renovate properties.
This type of mortgage requires borrowers to submit a construction plan for approval before their home loan can close. This can lead to longer closing timelines for borrowers.
Not all lenders are able to offer HomeStyle mortgages, so borrowers may have to look harder to find a mortgage broker.
Since lenders refer homebuyers to home inspectors to check out a home, write up the project plan and periodically inspect the home once the project is underway, projects can take longer to complete. The closing process can also take longer than a traditional mortgage, although the length of time it takes can vary. For example, if a traditional home takes an average of 43 days to close (as it did in March 2018), a Fannie Mae HomeStyle® Renovation Mortgage would take longer than that.
Who is this loan best for?
Because HomeStyle mortgages are for homes that need repairs, these loans are best for people that can see past the ugly finishings, or even the structural problems, and see the potential in a home. They are also good for people that have the flexibility to wait up to six months for the renovations to be done before moving in.
Since these loans are conventional home loans, they are also best for homebuyers who can meet the basic credit and income requirements to qualify for a traditional mortgage.