Guide to the Fannie Mae HomeStyle Renovation Loan

The Fannie Mae HomeStyle® Renovation Loan is a great way to roll in the cost of renovating a fixer-upper home into your mortgage. The HomeStyle loan program has more moving parts than a traditional home loan, so understanding how it works will help you decide if it’s the right remodeling mortgage for you.

What is a Fannie Mae HomeStyle renovation loan?

The Fannie Mae HomeStyle loan is a mortgage that allows you to buy or refinance a home and roll both the loan closing costs and renovation expenses into one loan. HomeStyle renovation loans are typically cheaper than using a credit card or a personal loan to upgrade a fixer-upper home.

The HomeStyle mortgage combines the features of a regular 30-year mortgage with a construction loan, allowing you to pay for work as it’s completed, instead of all at once. It may also allow you to borrow more than cash-out refinance guidelines allow, since the maximum loan amount is based on an estimate of the value with the improvements completed, rather than as-is.

What kind of improvements can I make with a Fannie Mae HomeStyle loan?

There are very few limitations on the size and scope of remodeling projects you can complete with a HomeStyle loan. This is in stark contrast to the FHA 203(k) program, a government-backed renovation loan that doesn’t allow for luxury improvements like swimming pools or outdoor fireplaces.

The table below provides you with some examples of projects you could finance with the HomeStyle loan:

The only no-no: You can’t completely tear down and rebuild a home with the HomeStyle loan.

How a HomeStyle renovation loan works

The basic process for getting a HomeStyle loan is the same as getting any other type of loan: You’ll need to apply for a home loan and meet basic income, credit and qualifying guidelines (explained in the requirements section presented later).

Below are some extra steps you’ll need to take to be approved for a HomeStyle loan:

1. FIND A CONTRACTOR. You can choose any qualified contractor to complete your project. Licensing is only required if your state requires it.

2. PROVIDE A CONSTRUCTION CONTRACT. The lender needs to approve a signed work contract with your contractor that details the project scope, completion date and costs for each phase. The contract is used to determine how your draws will be paid as each phase of the renovations is completed, so make sure it’s as accurate as possible.

3. DISCLOSE ANY DIY WORK. If you’re contributing your handyman skills to your renovation project, you’ll need approval from the lender for the work you’ll be doing. No more than 10% of as-completed value can go toward DIY work. You’ll be limited to a single-family home and can only be reimbursed for material and contract labor costs (in other words – you can’t pay yourself for do-it-yourself work).

4. SET ASIDE MONEY FOR RESERVES. Renovation loans typically require two types of reserves to help cover unexpected costs outside of your original construction budget: contingency reserves and payment reserves.

• Contingency reserves are usually optional and based on a percentage of your total project costs to cover overrides for labor and material. However, if you’re renovating a two- to four-unit property, lenders require 10% of the project costs in reserves.
• Payment reserves — commonly called mortgage reserves — are funds set aside to cover your monthly payments if you can’t live in your home during construction. The Fannie Mae HomeStyle loan allows you to finance up to six monthly mortgage payments.

5. DECIDE WHICH COSTS YOU WANT TO ROLL IN. Loan closing costs can be rolled into the loan if you have enough room based on the appraised value. If you’re not able to live in the home during renovations, you can also finance up to six months worth of monthly payments.

Fannie Mae HomeStyle renovation loan requirements

Credit score and debt-to-income ratios

You’ll need at least a 620 credit score for a Fannie Mae HomeStyle loan, while the maximum debt-to-income (DTI) ratio is 45%. These requirements are more stringent than the 580 FICO Score required for the government-backed FHA 203(k) program.

Higher credit score requirements for lowest rates in 2023

You’ll need a credit score of 780 or higher to snag the lowest rates on a HomeStyle loan in 2023. The new benchmark is 40 points higher than the previous 740 standard for getting the best rate.

Acceptable property types

You can renovate a one- to four-unit primary home, condo or co-op, planned unit development (PUD) or manufactured home. One important heads up: You won’t be able to borrow as much for a manufactured home renovation, and second home and investment property renovations are limited to one-unit properties.

Down payment

The table below reflects how much of a down payment you’ll need to make for a HomeStyle renovation loan depending on the type of home you’re financing and whether or not you plan to live in the home full time.

Appraised value

A home appraisal is required on a HomeStyle renovation loan. The appraiser will need a copy of your construction contract to complete the appraisal. You may also need to pay for a final inspection update so the appraiser can confirm all of the work is completed.

THINGS TO KNOW: What is “after-improved” value?

One major perk of the HomeStyle loan is your loan amount is based on your home’s “after-improved” value, which includes the renovations as if they’re completed. This gives you more borrowing power than a standard loan that’s always based on the “as-is” value of your home before any planned improvements.

For example, if you buy a home that doesn’t need repairs for $350,000, you’ll normally be limited to borrowing $339,500 for a 97% LTV ratio. With a renovation loan, if you need an extra $50,000 to make repairs on that $300,000 house, you might be able to borrow up to $388,000 if the “as-completed” appraised value is $400,000.

Draw schedule

You won’t have access to money whenever you want it. The lender will set a schedule based on finished work at different stages depending on how small or large your project is. Your contingency reserves can be tapped if labor or material costs come in higher than expected during some phase of the construction.

How long you have to finish your project

Renovations must be completed within 12 months from the date your loan closes.

Pros and cons of a Fannie Mae HomeStyle renovation loan

HomeStyle loan alternatives

If you don’t need all the bells and whistles of the Fannie Mae HomeStyle loan, or if you don’t qualify, 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 for home improvements.

A word of warning

Fannie Mae increased fees for conventional cash-out refinances in 2023, which are usually passed down to you in the form of a higher interest rate. You’re also limited to borrowing 80% of your home’s as-is-value, which may not be enough to fund a large reno project.

Home equity loan or home equity line of credit (HELOC). You can convert a portion of your home’s equity to cash with a home equity loan or a HELOC. A home equity loan is a lump-sum loan with a fixed rate, while the line of credit works more like a variable-rate credit card.

Personal loan. A personal loan doesn’t use your home as collateral, so you won’t risk losing it to foreclosure if you can’t repay the loan. However, you’ll typically pay higher interest rates and have shorter repayment term options than HELOCs and home equity loans.

Credit card. Using a credit card may be worth it for smaller “pay-as-you-go” projects, 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 make sure you track the “interest-free” period so you’re not stuck with high interest charges.

FHA 203(k) loan. The Federal Housing Administration insures an FHA 203(k) loan with lower credit score requirements than conventional loans. Like the HomeStyle loan, you can roll the cost of repairs and the purchase price into one loan.

Good news in 2023 for FHA 203(k) borrowers

The FHA reduced the annual mortgage insurance premiums this year, which could lead to a lower monthly payment for a 203(k) renovation loan. And unlike private mortgage insurance (PMI), a low credit score doesn’t impact annual MIP costs, making it a good choice if you have a low credit score.