If you wish to purchase a home that needs renovations or already own a home that needs fixing up, there is an option out there that allows you to obtain the funds necessary to purchase or refinance the home as well as have the funds to fix it up all in one mortgage. This single close mortgage is called the Homestyle Renovation Mortgage and is a Fannie Mae program. The mortgage product offers flexibility in terms of the down payment and the guidelines, enabling many homeowners to have the ability to fix up their current or future home to their liking.
Purpose of the Homestyle Loan
The Homestyle Renovation Mortgage is strictly designed to help consumers purchase/refinance and renovate a home. If you are refinancing the loan, it is a limited cash-out refinance, but it works a little different than the standard Fannie Mae Limited Cash Out loans. With this program, you get cash out of your home when you refinance in order to pay off the existing mortgages (first and second), to pay the closing costs and other fees in conjunction with the loan, and the renovation costs approved by the lender and allowed with the LTV ratio you are eligible to receive. Aside from that, you are not allowed to have any cash in hand as is the cash with standard Limited Cash Out Refinances. The standard 2 percent or $2,000 cash-in-hand does not apply to this program. If there are funds left over after the renovations are complete, you have several options:
- Pay the loan balance down
- Reimburse you for any supplies you had to purchase (with receipts)
- Reimburse the cost of any other renovations you completed (with receipts)
Eligible Properties for Homestyle Renovation
The Fannie Mae Homestyle Renovation Mortgage can be used on a wide variety of properties. The type of home depends on the use the home will receive:
- Principal Residence – 1 to 4 unit properties including PUDS, condos, and co-ops
- Second Homes – Limited to 1 unit which includes single family homes, PUDS, condos, and co-ops
- Investment Properties – Limited to 1 unit the same as second homes
Manufactured homes are not eligible for this type of financing.
The list of allowed renovations is rather broad for this program, giving you plenty of leeways to get your home the way you want it. Basically, as long as the changes increase the value of the property and are a permanent fixture in the home, they are allowed. Beyond that, there are no restrictions or requirements in terms of what renovations can be done on the home. The only exception to the rule is if you are using the funds to make energy efficiency changes to the home. If this is the case, you must have an energy report completed that details the changes that could be done and the savings they would provide.
The changes done to the home can start as soon as 3 days after you close on the loan and must be completed within 12 months of that time. The contractor chosen to work on your home must be approved by the lender ahead of time. The lender will determine if the contractor is qualified to work on the property and receive the funds necessary to do the work. The contractor must be licensed, bonded, and able to complete the work in the desired time frame. Before any work can begin, you must have a contract with the contractor. There is a standard form your lender can provide you that was drawn up by Fannie Mae to help guide you in the right direction. In addition to the contract, you should have solid plans drawn up by the contractor or a licensed architect so that the work goes according to plan and the provided funding is adequate.
If you prefer to do the work yourself, you must have a one-unit property and receive lender approval. The repairs you complete cannot total more than 10 percent of the estimated appraised value of the home after the repairs are completed and any repairs that total more than $5,000 must be inspected by the lender. You can receive reimbursement for all of your costs including those for materials; however, the lender will hold a contingency in the event that you are unable to complete the repairs and a professional needs to be called in to complete it.
The Loan to Value (LTV) Ratio
The loan-to-value ratio plays a role in the Homestyle Renovation loan as it does with any other loan program. If you purchase a home, you are subjected to a maximum 85 percent LTV. The LTV is figured based on the appraised value of the property after the potential repairs are completed or on the purchase price plus the cost of the repairs, if that amount is lower. The loan amount remains the same no matter which figures you use. The lender will use the lesser and maximize your loan at 85 percent of that amount.
If you refinance your home to fix it up and it is a one-unit property, you can have a loan-to-value ratio up to 95 percent of the completed appraised value. If you have more than one unit, the LTV decreases as follows:
- 85 percent on a 2-unit
- 75 percent on a 3 or 4-unit
- 90 percent on one-unit 2nd homes
Renovation Costs Allowed
You are allowed to include renovation costs up to 50 percent of the appraised value after the renovations are done. This includes all labor, materials, licenses, plans, and permits. It also includes a contingency in the event that something goes wrong – most lenders keep up to 10 percent on hand, just in case, although this is optional unless it is a multi-unit property. If you must leave the property and stay elsewhere while the work is done, you can also include six months of principal, interest, taxes, and insurance in order to have the cash flow available to pay to live somewhere else. This is only available if your home is not livable while the work is done, though.
Disbursing the Funds
The funds are disbursed as the lender sees fit. A contract with the timing of the disbursements is drawn up before the closing and approved by everyone involved before you sign the loan papers. The lender is in charge of the escrow funds, keeping the money in an interest-bearing account until their money gets disbursed. The leftover funds can be dealt with after the Completion Certificate is received by the lender.
Flexible HomeStyle Lending Guidelines
In general, borrowers that qualify for a conventional loan will qualify for the Homestyle Renovation loan. Since it is a Fannie Mae loan, the standard requirements apply including having good or excellent credit scores, plenty of reserves, stable employment, good income, and debt ratios along the lines of 28 percent up front and 36 on the back. There are exceptions to every rule and every lender will differ in what they expect so there is no hard and fast rule regarding who will qualify. If you think you have good credit and low debt ratios, it is worth applying for this loan to see if you qualify.
The Homestyle Renovation Loan is a great way to get into a home you want and make it look the way you want it to look. You have a large amount of flexibility with this program since it is a Fannie Mae program. If you have great credit, it is worth looking into this loan as opposed to the FHA 203K loan as it is a cheaper option because you do not have to pay the FHA annual mortgage insurance for the life of the loan. Even if you have to pay PMI if you borrow more than 80 percent of the appraised value after repairs, it will likely be less expensive than the 203K loan would cost.Click to See the Latest Mortgage Rates»