A renovation project does not just add comfort and style to your home: home improvements can significantly boost resale value and make it easier to sell.
While there are many options for managing renovation expenses, one of the best options is the Fannie Mae HomeStyle renovation loan, available for conventional loans that meet specific guidelines. These loans streamline your payments and make it easier to finance even large projects.
This article will explore the benefits and requirements for Fannie Mae HomeStyle renovation loans so you can choose the perfect option for your renovation needs.
What is the Fannie Mae HomeStyle Renovation Loan?
Fannie Mae HomeStyle renovation loans allow homeowners to combine the purchase price and renovation costs into a single loan balance, making it easier to afford monthly payments while managing project costs.
Loan Purpose
A Fannie Mae HomeStyle loan is to finance the home purchase and the renovation costs into a single loan rather than requiring you to take out a second loan amount for the remodel. This can make it a better option than home equity loans, as you will not pay two separate mortgages monthly and can better estimate your payments.
Eligible Borrowers
These renovation home loans are offered to primary residences and investment properties. Several different property types are eligible, including manufactured homes, condominiums, townhomes, and multi-unit properties with four or fewer units.
Partnership with Fannie Mae
Fannie Mae is not a lender itself; instead, it is a government-sponsored enterprise (GSE) that buys mortgages from lenders to reduce the risk to any financial institution. However, Fannie Mae loans, including HomeStyle loans, must meet specific qualifications.
Once the renovation is complete, your Fannie Mae HomeStyle loan must meet the conforming loan standards. This means that it must be equal to or less than the maximum loan amount set by Fannie Mae in your particular county, which ranges from $806,500 to $1,209,705 in high-cost areas for a one-unit home. You can get a HomeStyle renovation mortgage for up to a four-unit property.
Only some lenders will offer HomeStyle loans, even if they offer conventional mortgages. Our team can answer your questions about Fannie Mae’s guidelines and which lenders might finance your needs.
Benefits of the HomeStyle Renovation Loans
A Fannie Mae HomeStyle renovation loan provides excellent benefits for those needing renovation funds, including simplicity and ease of use. This loan may be ideal if you’ve found the perfect fixer-upper home but need work.
Single Loan, Lower Costs
Many buyers needing renovation funds must take out a second loan in addition to their primary mortgage, which can quickly become confusing. You are paying two different interest rates, and both will have a minimum down payment.
Additionally, a personal loan may have exorbitant interest rates, and home equity loans or cash-out refinances require you to already own a property.
A HomeStyle renovation loan solves this problem by combining both loan types. You receive the money for home renovations, and when the work is completed, the loan converts into a conventional mortgage, so you only have to make one mortgage payment every month.
Increased Purchase Power
Including renovation work expenses in your offer will give you a more competitive bid, helping you stand out amongst other bidders. This is especially helpful in a tight market where many buyers want to purchase the same property.
Additionally, those purchasing an investment property can edge out the competition, which can be especially fierce in up-and-coming markets that other investors want to add to their portfolios.
Flexibility
With a Fannie Mae HomeStyle renovation loan, you can fund various projects that vary in scale and scope.
Whether you need a minor update like rewiring electricity to add more light fixtures, or you want a major renovation project like adding a new room or redoing the kitchen, it’s possible to roll all of this into the same loan.
Potential for Increased Home Value
A HomeStyle renovation loan can fund projects that the typical FHA loan cannot, including luxury items like a swimming pool or an accessory dwelling unit (ADU). This can boost the home value significantly and make it easier to sell.
How the HomeStyle Renovation Loan Works
Before seeking a Fannie Mae HomeStyle loan, it’s important to understand that the requirements are often stricter than for other Fannie Mae loans.
The renovation loan must be used for something permanently affixed to the property, but various eligible projects, including garages, fences, and remodels, are eligible. You can also secure funding for many properties, such as manufactured homes, duplexes, one-unit properties, and townhomes.
Find a Lender
Only some lenders will offer Fannie Mae HomeStyle loans. Those that do will often have higher credit score requirements and may require you to have up to six months of cash reserves in case of issues with the remodel.
Our loan officers can help walk you through your options to ensure you get the right lender for your needs.
Renovation Costs and Contractors
A HomeStyle renovation loan does not always cover extensive do-it-yourself work. DIY renovations cannot account for more than 10% of the completed value of the property. Borrowers can request reimbursement for materials but not labor.
You may need to work with an approved contractor, who will submit their plans to the lender for approval before the loan can be underwritten.
As with finding lenders, take your time and get numerous estimates before committing to any contractor. You should ask them if they have experience with this project and have ever worked with the Fannie Mae HomeStyle program.
Appraisal “As Completed”
With a HomeStyle loan, the purchase price is not the appraised value but the as-completed value. This means the loan is underwritten based on the home’s estimated value after all the repairs are done rather than its current market value.
Depending on how extensive the project is, this may be significantly higher than it is currently worth. You’ll need to make a down payment that is a percentage of about 3-5% of this after-repair value on HomeStyle renovation loans, so be aware that you may need a much higher down payment than you expected initially. However, it depends on what the house will be used for and if it’s your first house.
Lenders may ask you to pay more upfront if you do not have a good credit score or if they feel that the renovation you’re requesting may be riskier.
Underwriting
As with other loans, the lender will evaluate your finances as they would with any other loan, including your debt-to-income ratio, credit score, and payment history.
The lender will also examine the renovation plans to decide whether they will add value and how much they should be worth. Renovation plans must meet LTV requirements.
Much of the underwriting proceeds from this, as with any other conventional loan. You will have a minimum down payment requirement; if you provide less than 20%, you must provide private mortgage insurance payments. You will also provide closing costs to offset the expenses of underwriting the loan.
Managing Funds
With a HomeStyle loan, the renovation money is not provided upfront. Instead, it is released in stages according to how the project progresses and what is needed. For example, architect fees will be released shortly after the closing date, while funds for electrical wiring will be released later.
There will be frequent inspections to ensure that the project is proceeding as inspected, and only after these inspections will the money be paid out.
Sometimes, you must pay for contingency reserves, which may be rolled into the overall loan. These are used if it is found that there are deficiencies in the construction or if the project runs into unforeseen difficulties.
Reserves are only required for two to four-unit properties, though a lender may require them for a riskier one-unit project, like a manufactured home.
If the contingency reserves aren’t used during the project, they will be applied to the remaining HomeStyle loan balance.
Who is a Good Candidate for a HomeStyle Loan?
A Fannie Mae HomeStyle loan can be a great option for many buyers or homeowners who need additional funds to perfect their dream home, including the following groups.
Buyers Needing Renovation Funds
Whether for urgently required rehabbing or a personal passion project for a single-family home, a Fannie Mae HomeStyle loan can give you the funds you need to make home improvements.
These loans can be a great option for borrowers with excellent credit purchasing their first property. You’ll be able to predict your funding needs and budget wisely.
You’ll need to demonstrate that this will add to the home’s appraised value and work with a qualified contractor, but it can ensure your home is precisely what you want.
Investors
HomeStyle loans are frequently used by real estate investors who see potential in a project and seek to enhance its purchase price. This could be a good option for house flippers or those who want to rent a single-family property.
Fannie Mae will purchase loans for properties with four units or less, so it can’t be used for large apartment buildings.
Homeowners Wanting to Remodel
Current homeowners may also use a Fannie Mae HomeStyle loan to increase the value of their property, whether by improving its functionality or boosting its resale value.
HomeStyle loans are a perfect option for those who want to improve energy efficiency, as they can be combined with the HomeStyle Energy loan to add even more value.
Alternatives to a Fannie Mae Remodel Loan
Sometimes, a Fannie Mae HomeStyle loan differs from what a borrower is looking for, such as a borrower who wants to fix up a vacation home or an investor who wants to add to their portfolio. In these cases, other options may be a better fit.
Those who already own homes may choose a home equity loan, which allows them to tap into their equity by taking out a larger mortgage. This second mortgage provides you access to a portion of your home equity, which can be used for renovations.
A cash-out refinance allows you to close out your original mortgage and open a new one that incorporates your home equity. You then get a lump sum payment of your equity, which you can use toward whatever needs you may have.
Unlike a HomeStyle loan, a cash-out refinance does not have to be used for an approved construction project; you get all the money upfront. There are also no down payment requirements, though you will need to pay closing costs.
Finally, a home equity line of credit works like a credit card, but your home’s equity backs it. You can draw money from the account for ten years, where you won’t have to pay back what you spend. Then, the drawing period closes, and you begin to pay back the sum you used with interest.
Summary
A HomeStyle loan can be a great option for those who want to purchase a home with potential that needs significant renovations. This loan allows you to roll both construction and purchase costs into one mortgage, making it easier to finance.
Some stipulations apply, including that you work with a qualified contractor, submit your plans to your lender, and meet all the typical conforming loan requirements for a Fannie Mae loan. This type of loan is available to both homeowners and investors.
F5 Mortgage is here to help you understand your home loan options and ensure you get the perfect product for your specific needs. We offer a variety of products, including conventional loans, FHA loans, VA loans, and DSCR loans for investors.
Get a free quote today to learn how much you can afford, or contact us with your specific questions about the home loan process. You can also call us to get help from a qualified loan officer. We look forward to helping you find the perfect loan for your dream property.
