Fixing up your home or a home you want to buy can be expensive. What happens if you don’t have the cash lying around to do it? Are you stuck with a home equity loan or expensive personal loan? Fortunately, Fannie Mae, the guarantor of conventional loans, offers a rehab loan. The Fannie Mae HomeStyle loan helps you purchase or refinance a home while getting funds to make the renovations.
Keep reading to learn how the Fannie Mae HomeStyle Loan works.
Understanding the HomeStyle Loan
The Fannie Mae HomeStyle loan works much like its counterpart, the standard conventional loan. The most common use for borrowers is buying a home that needs work. The HomeStyle loan gives borrowers the funds to buy the home and renovate it all in one loan. This means you only make one mortgage payment each month.
Fortunately, you can use the Fannie Mae HomeStyle loan on any type of renovation. Fannie Mae doesn’t restrict the work you can do with the funds. The only stipulation is that you complete the renovations within 12 months of taking out the loan.
You close on your Fannie Mae loan just like you would any other purchase. The difference is the ‘extra’ money that you receive. The lender will keep the funds in an escrow account for you. The lender will disburse the funds as dictated in the construction schedule. They do so after inspection to ensure that all work is complete as discussed.
Who is Eligible?
Eligibility for the Fannie Mae HomeStyle loan is similar to the requirements for a standard conventional loan.
First, you must have at least a 3 percent down payment. Fannie Mae wants borrowers to have a little equity in the home. This helps ensure that you make your mortgage payments moving forward. If you don’t make your mortgage payments, Fannie Mae has a little wiggle room in how much they need to recoup when they sell your home as a foreclosure.
You’ll also need good credit. According to Fannie Mae, you can get a HomeStyle loan with a credit score of at least 620, but many lenders require a higher score. Since it’s the lender and not Fannie Mae that underwrites and funds the loans, lenders often require higher credit scores to lower the risk of default.
Lenders also require a maximum debt ratio of 43 percent. This means your total debts cannot take up more than 43 percent of your gross monthly income. Your total debts include the new mortgage payment, credit card payments, student loans, personal loans, alimony, and child support payments.
Who Does the Renovations?
You must hire a contractor to do the renovations on the home. While you are in charge of finding and hiring the contractor, your lender must approve the contractor. The contractor must provide his or her credentials. You must also have a signed and executed construction contract with him or her that the lender approves. The only time you can do the renovations yourself is if the cost of the renovations equals less than 10 percent of the updated value (after renovations) of the property.
How Much can you Borrow?
Fannie Mae allows you to borrow the lesser of up to 75 percent of the after-renovated value of the home for renovations or the purchase price plus the cost of renovation. If you are refinancing, you can borrow up to 75 percent of the after-renovated value of the home. Of course, this depends on how much you qualify to receive. You aren’t automatically eligible for the maximum loan amount – you must show that you can afford the payment first.
The Fannie Mae HomeStyle loan helps open up possibilities to purchase homes that other loan programs would decline. If you fall in love with a home that isn’t ready to be lived in yet, the HomeStyle loan can help. With one mortgage payment to make each month and few restrictions on what you can do with the funds, you can create your dream home with an affordable mortgage program.Click to See the Latest Mortgage Rates»