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If you aren’t able to find your dream home, you could make one with upgrades and renovations.
With mortgage rates at historic lows, the housing market has become much more competitive and houses are being snatched up quickly. A fixer-upper may expand your options. One way to finance this endeavor is with the Fannie Mae HomeStyle Renovation mortgage, which is the only conventional loan that allows you to fold home improvement costs into your mortgage.
Say, for example, “there’s a house in a neighborhood and price range I want, but it needs all this updating. A renovation loan is perfect for a house like that,” says Megan Marsh, co-founder and loan officer at Keystone Alliance Mortgage. You can buy it and roll your renovation [costs] in and make it what you want,” she says.
What Is a HomeStyle Renovation Mortgage?
The HomeStyle Renovation mortgage is a loan backed by the Federal National Mortgage Association (Fannie Mae) that offers financing for home repairs and remodeling. The HomeStyle loan can be taken out as part of a purchase or refinance. Unlike taking out a second mortgage, this loan allows you to borrow funds for your mortgage and home renovation (such as a kitchen remodel or new pool) in one loan.
This loan is significant, too, because it’s the only loan type that’s backed by Fannie Mae or Freddie Mac and is available to investors, according to Lisa Phillips, real estate investor and author of Investing in Rental Properties for Beginners. Others are typically geared toward owners intending to live in their homes as primary residences.
How a HomeStyle Renovation Mortgage Works
You can get a HomeStyle loan only through a Fannie Mae-approved lender, and it can only be used for your primary home, a vacation home, or an investment property. Like any other mortgage, it offers 15- and 30-year terms with either a fixed or adjustable APR.
As long as it’s a permanent update and adds value, the HomeStyle loan “can be used on pretty much anything,” Marsh says. “You can do an addition on a house, you can put a pool in. Most people use them to redo a kitchen [or] add a bathroom.”
With a HomeStyle loan, you can borrow up to 75% of the “as-completed” appraised value of the property (as in, the expected post-renovation value), rather than the pre-renovation value. This allows you to borrow more funds for your project than you otherwise would. All home renovations would need to be completed within 12 months. Just keep in mind the funds will be disbursed to a contractor on a draw schedule, and not to you directly.
HomeStyle loans can also be valuable if the appraiser finds major damage on a home during the homebuying process and requires it to be fixed for sale to be completed. If you don’t have the money upfront to fix the roof by closing, you could use a HomeStyle loan to add the costs of a roof repair to your mortgage.
HomeStyle Loan Requirements
To get a HomeStyle loan, you’ll need a FICO score of at least 620 and a debt-to-income ratio lower than 45%.
Properties eligible for a HomeStyle loan includes one-to-four unit primary residences, one-unit vacation homes, manufactured homes (up to 50% of the “as-completed” value), and one-unit investment properties, which include condos and co-ops.
Marsh says the process and eligibility for a HomeStyle loan are similar to a regular mortgage, except there are added rules for the contractor. “You’ll need a contractor to fill out a resume, they have to have references, and they have to have insurance, because the bank is thinking, ‘If we’re going to lend this extra money, this has to be a contractor who has a good reputation because they’re the ones doing the work,’” Marsh says. The contractor also needs to provide a detailed plan, stick to a timeline, and have their work inspected by an appraiser. They can’t charge more than 50% of the material cost upfront before an inspection is required.
With a HomeStyle loan (and most renovation loans, in general), you can’t act as your own contractor, even if you consider yourself handy. Some lenders will allow you to DIY some projects, as long as it’s 10% of the “as-completed” value for a one-unit, owner-occupied home.
HomeStyle Loan Pros and Cons
5% down payment requirement
With a HomeStyle loan, the minimum down payment is 5% of the post-renovation appraised value (appraised value + renovation costs). That means if your new home is worth $200,000 and the expected renovation cost is $50,000, you’ll need to put down at least $12,500.
Less savings required
HomeStyle loans allow you to save on some major, upfront expenses. “You can wrap the renovation costs into the mortgage,” Phillips says. “It is similar to an [FHA] 203(k) loan, which is owner-occupied, where if there’s construction to be done, they can estimate the cost of that and you just get a mortgage without having to pay for a mortgage plus the extra money for renovation, which is easier for homeowners to afford.”
Say you’re buying a $100,000 home with a conventional mortgage and a 5% down payment, which is a $5,000 down payment. If you’re planning for $20,000 in renovations, now you need $25,000, which is a major increase in upfront costs. “HomeStyle [loans] allow you to buy the house for $100,000 and documentation for rolling $20,000 of renovations into the loan. Only need 5% down on a $120,000 loan,” Marsh says.
Paying a percentage of the expected renovation costs upfront, instead of the full amount, makes a huge difference. “Many borrowers use every bit of savings to buy a house,” Marsh says, adding that this cost goes up the older a home is. “If a borrower uses this product, they wouldn’t have to save so much.”
Real estate investors are allowed to apply
HomeStyle renovation loans can be used by real estate investors — a rarity among Fannie Mae loans. “Government loans [typically] have to be owner-occupied. HomeStyle is the only one you can do for investment properties and second homes,” Marsh says.
Longer mortgage process
Applying for a home with a HomeStyle loan will likely take longer than if you apply with a regular loan (which typically take 50 days to close). This longer waiting period is an added risk for the buyer. “We highly recommend contracts written up for between 60 and 90 days, depending on what they’re going to be doing [in home improvements],” Marsh says. “It’s an extra month and when you have this super competitive market — if two or three people are putting offers in — then someone asking for 90 days, versus 30 to 45 days, may not get accepted.”
Potential issues if appraisal comes in lower
Once renovations are completed, your lender requires your home to undergo another appraisal. If it’s valued less than the “as-completed” value (as in, your remodel didn’t increase the home value as much as expected), you’ll need to pay up. “That’s the tricky part with these loans,” Marsh says.
For example, you may buy a home appraised at $75,000, expecting to spend $25,000 for home improvements. The “as-completed” value would be $100,000. “Let’s say that house only appraises for $95,000. The borrower then needs to [pay the $5,000] difference. They borrowed more than they needed.”
HomeStyle Loans vs. Other Home Renovation Loans
The Federal Housing Administration (FHA) offers a government-backed rehab loan called a 203(k). Compared to the HomeStyle loan, a 203(k) has more lenient standards when it comes to credit score (580 versus 620), down payment (3.5% versus 5%), and loan-to-value ratio (110% versus 97%). However, the FHA requires you to complete your renovation within six months instead of Fannie Mae’s required 12 months. And a loan through FHA doesn’t cover luxury additions like pools, hot tubs, and outdoor fireplaces. The HomeStyle loan is more flexible with uses — as long as the home value is expected to increase.
Home equity loans and lines of credit
Taking out a second mortgage (such as a home equity loan or HELOC) is a common way for people to finance home renovations. A key difference between a second mortgage and a HomeStyle loan is that the amount you can borrow from home equity loans and HELOCs is based on how much home equity you currently have. With HomeStyle loans, what you borrow is based on the expected value of your home after the project is completed, so you don’t need to achieve a certain amount of equity. However, with second mortgages, you collect the funds directly and aren’t subject to contractor approval, strict timelines, and inspections.