What Is the Fannie Mae HomeStyle Renovation Loan?
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If you’ve found the perfect fixer-upper home but need extra cash to cover the down payment, closing costs and renovation expenses, the Fannie Mae HomeStyle® Renovation loan may be a good option.
With the Fannie Mae HomeStyle loan, you can roll home remodeling costs into your mortgage, but applying for the program is more complicated than a traditional home loan.
What is the Fannie Mae HomeStyle loan?
The Fannie Mae HomeStyle loan allows buyers to finance the cost of purchasing and remodeling a home with one loan. HomeStyle renovation loans are typically cheaper than using a credit card or a personal loan to upgrade a fixer-upper home.
A Fannie Mae HomeStyle loan may save a purchase transaction that might otherwise fall apart if a seller is unwilling or unable to make buyer-requested repairs. This conventional renovation loan allows you to:
- Make a down payment as low as 3%
- Borrow a loan amount based on the home’s post-renovation estimated value
- Finance one- to four-unit homes, investment properties, condos and manufactured homes
- Renovate a home you’re buying or refinancing
- Do some of the work yourself
- Roll mortgage payments into the loan if you can’t live in the home during renovations
Fannie Mae HomeStyle loan guidelines
Before you apply for a Fannie Mae HomeStyle loan, it’s important to understand the guidelines and features of this program.
The minimum down payment depends on the type of property you’re buying, and whether you’re living in it or not. You’ll typically make a down payment of:
- 3% for one-unit homes
- 5% for manufactured homes
- 10% for one-unit second homes
- 15% for two-unit homes
- 25% for three- to four-unit homes
Credit score and debt-to-income ratios
You’ll need at least a 620 credit score for a Fannie Mae HomeStyle loan. The maximum debt-to-income (DTI) ratio is 45%.
A loan-to-value (LTV) ratio measures how much you’re borrowing compared to your home’s value by dividing your loan amount by the home’s appraisal value.
Typically, lenders use the “as-is” or the current value of your home for a mortgage. With a renovation loan, though, lenders base your loan amount on the “as-completed” appraised value. This reflects what your home might be worth after it’s renovated.
For example, if you buy a home that doesn’t need repairs for $200,000, you’ll normally be limited to borrowing $194,000 for a 97% LTV loan. With a renovation loan, if you need an extra $50,000 to make repairs on that $200,000 house, you might be able to borrow up to $242,500 if the “as-completed” appraised value is $250,000.
A lender must approve your renovation project if you get a Fannie Mae HomeStyle loan. You’ll need to provide the following documents:
- Copy of the contractor’s license
- Signed work contract with the renovation company
- Outline of project scope, completion date and costs for each phase
If you have some handyman skills or you work in the construction field, you may be able to do some of the renovations yourself. However, there are more restrictions if you opt for DIY renovations, such as:
- The lender has to approve the work you’ll be doing
- No more than 10% of the loan amount can be applied to DIY work
- DIY work is limited to a single-family home only
- The reimbursement will be based on the cost of materials and contract labor
Special reserves for renovation loans
You may run into unexpected remodeling costs that weren’t part of your original construction budget. In addition, you might not be able to live in the home while the construction is going on.
Contingency reserves and payment reserves address both of these common renovation dilemmas.
Contingency reserves involve labor, material or cost overrides and may be required, depending on the scope of the project. If you’re renovating a two- to four-unit property, you’ll need to have 10% of the total project costs in reserves, otherwise contingency reserves are optional.
Payment reserves, also called “cash reserves,” can be rolled into your loan if the repairs are so extensive that you can’t live in the home. You can finance up to six months of your monthly mortgage payments with a Fannie Mae HomeStyle loan.
Second mortgage option for a down payment
Depending on where you live, you may be able to apply for down payment assistance through Fannie Mae’s Community Second program. Federal, local and nonprofit housing agencies, as well as some employers, may offer cash — up to 5% more than your home’s value — to help cover your down payment, closing and renovation costs.
To qualify for the program, the home must be your primary residence and your lender will confirm you can repay both mortgages. If you finance more than your home’s value, though, you might end up paying money at closing if you have to suddenly sell the home. Make sure you can afford the payment and don’t have plans to sell in the near future.
Pros and cons of a Fannie Mae HomeStyle loan
|You can buy and renovate the home with one loan.||You need to provide more paperwork than a regular loan.|
|You can refinance and improve your home with one loan.||You’ll have to do more research to find lenders who offer renovation loans.|
|You can expand your home search to fixer-uppers.||Your project must be completed within 12 months of closing.|
|You can get a loan to renovate a primary, vacation or investment home.||You need a higher minimum credit score than you would for government-backed renovation loans.|
|You may be able to finance monthly payments if you can’t live in the home.||You’re responsible for finding a contractor and getting plans for the renovations.|
Other home renovation mortgage options
You may not need all the bells and whistles of the Fannie Mae HomeStyle loan. Here’s a list of other home improvement loans to consider.
Cash-out refinance. You can borrow more than you currently owe on your mortgage and pocket the difference in cash with a cash-out refinance.
Home equity loan or home equity line of credit (HELOC). A home equity loan or HELOC allows you to withdraw a portion of your home’s equity in cash with a second mortgage. While a home equity loan and a HELOC both allow you to tap your equity, a home equity loan is a lump-sum loan with a fixed rate, while the line of credit works more like a credit card and often comes with a variable rate.
Personal loan. A personal loan is unsecured, meaning it doesn’t use your home as collateral so you won’t risk losing it to foreclosure if you fail to repay the loan. Personal loans are typically limited to a maximum amount of $50,000. They may have higher rates than home equity products.
Credit card. For smaller, “pay-as-you-go” projects, using a credit card may be worth considering, especially if you find one with a 0% APR for an introductory period. Credit cards tend to have higher interest rates than other financial products, so use them with caution.
FHA 203(k) loan. An FHA 203(k) rehab loan is insured by the Federal Housing Administration and available to borrowers with lower credit scores than conventional loans. Like the HomeStyle loan, you can roll the cost of repairs and the purchase price into one loan.