You’ve searched for the home of your dreams but haven’t had much luck. Or maybe you’ve found a property in an ideal location, but it doesn’t quite have the features you’d prefer in a home.
Do you spend more building the perfect home, or do you find a home you can renovate? The latter could be a more sensible choice, and there are loan options to make it possible.
In this guide, you’ll discover how a HomeStyle Renovation Loan from Fannie Mae can help you fund improvements on a home you wish to purchase or your current home. You’ll also learn about a viable alternative that lets you unlock even more borrowing power to create the home of your dreams.
What is a HomeStyle Renovation Loan?
A Fannie Mae Homestyle Renovation Loan is a government-sponsored mortgage product that lets you roll the purchase price of the home and future upgrades into a single loan product. So, you’ll only pay closing costs on one loan and make one monthly mortgage payment to the lender.
These loans cater to homebuyers who are looking to buy a property that’s already built and not new construction. You can also use this loan to refinance and renovate your current home.
You’ll get a 15- or 30-year fixed or adjustable-rate mortgage. Loans are capped at $548,250 for single-family properties. If you live in a more expensive area, you could qualify for a loan of up to $822,375.
The loan limits for multifamily properties are limited to $685,400 for four-unit properties and $1.5 million in more expensive areas.
How Does a HomeStyle Renovation Loan Work?
You’ll work directly with a bank to secure a HomeStyle Renovation Loan, as Fannie Mae is not a direct mortgage lender. However, the government-backed entity generally purchases home loans from banks to clear their books of mortgage debt and continue to extend loans to high-risk borrowers.
If you take out a HomeStyle Renovation Loan, the seller is compensated at closing. However, the funds for renovations are only released when the following takes place:
- The homeowner selects an approved contractor to complete renovations.
- The contractor sends renovation plans to the bank to request a draw.
- An inspection is done on the property to confirm the completion of the renovation.
- The bank compensates the contractor directly.
The amount you can borrow is limited to 95 percent of the home’s after-renovation value. So, if you plan to purchase a home that’ll be worth $375,000 after renovations are complete, you could qualify for up to $356,250.
What Can You Use a HomeStyle Renovation Loan For?
Homebuyers, investors and current homeowners can use HomeStyle Renovation Loans to complete practically any type of home upgrade within 12 months of the closing date. However, projects that are not permitted include:
- Demolition of the property
- Construction of a second property
- Temporary improvements (i.e., storage sheds)
Also, note that structural upgrades on manufactured homes are also limited to the lesser of 50 percent of the projected appraised value of the property or $50,000.
These loans can also be used to cover closing costs, temporary living expenses while home upgrades are being completed, and other fees that are incurred as a result of construction on the property.
HomeStyle Renovation Loan Pros and Cons
Aren’t you quite sure if a HomeStyle Renovation Loan is a good fit? Consider the pros and cons before making an informed decision.
The Benefits of HomeStyle Renovation Loans
- Your borrowing power is based on the property’s after-renovation value, unlike home equity loans and other loan renovation projects.
- You can get a loan to purchase and renovate a new property or refinance and renovate a property you already own.
- You could get approved with a down payment as low as three or five percent of the loan amount.
- You can use the loan on a vacation home, investment property or secondary residence.
- You won’t pay double closing costs.
- You won’t pay upfront mortgage insurance.
- You don’t need excellent credit to qualify.
The Disadvantages of HomeStyle Renovation Loans
- The underwriting and approval process is more lengthy than what you’ll find with conventional loans
- You’ll have to pay mortgage insurance if you put less than 20 percent down.
- The closing costs are steep.
- You could get a lower interest rate with a traditional cash-out refinance or home equity loan product.
- You’ll need mortgage insurance with a low down payment.
- There’s a limited timeline to complete renovations.
- You’ll have to refinance your existing mortgage.
What Are The Requirements of a HomeStyle Renovation Loan?
Property Requirements
Wondering if the property you’re considering is eligible for a HomeStyle Renovation Loan? Here’s a list of properties that could qualify:
- Condo and co-op units
- Single-family homes
- Townhomes
- Single-unit investment properties, manufactured homes or second homes
- Double, triple or quadruple-unit properties
Down Payment and Loan to Value
You’ll need a five percent down payment to secure a HomeStyle Renovation Loan. However, you could qualify with a down payment of just three percent if you’re eligible for the Fannie Mae HomeReady program.
Here are the downpayment requirements for both investment and multifamily properties:
- Single-unit investment property: 15 percent down payment (or 25 percent down payment for refinance transactions)
- Second home: 10 percent down payment (90 percent loan-to-value)
- Double-unit property (i.e. duplex): 15 percent down payment (85 percent loan-to-value)
- Triple or quadruple-unit property: 25 percent down payment (75 percent loan-to-value)
Credit Score
Fannie Mae requires a credit score of at least 620, and your debt-to-income ratio shouldn’t exceed 45 percent.
