Fannie Mae Homestyle RenovationCASAPLORERTrusted & Transparent
A HomeStyle loan is offered by Fannie Mae approved lenders and can be used to finance the purchase of a home and the costs needed to renovate it. You can also take out a HomeStyle loan if you are looking to refinance your existing mortgage and take out additional funds to cover renovation expenses.
- HomeStyle loans allow borrowers to purchase a house and renovate it all through one mortgage
- You can use a HomeStyle loan to refinance your current mortgage and take extra funds to perform renovations
- You can borrow up to 75% of the “as-complete” appraised value of the house or 75% of the purchase price plus renovations, whichever is lower
- Interest rates on HomeStyle loans are typically lower than other alternatives, such as HELOCs, personal loans or credit cards
What is a Fannie Mae HomeStyle Loan?
A Fannie Mae HomeStyle Loan is a government-backed mortgage that allows borrowers to purchase a house and perform renovations on it. A HomeStyle loan can also be used to refinance the mortgage you already have on a house and get the extra funds needed to cover renovations costs.
A HomeStyle loan is very convenient because it allows you to take only one mortgage to fund two different projects: the purchase and renovation of the house. You borrow only once and you pay the same mortgage rate for both. Some of the perks include submitting only one mortgage application, paying only once for closing costs and making one monthly mortgage payment.
Fannie Mae HomeStyle loans come in various forms. They can be 15- or 30-year fixed-rate mortgages or adjustable rate mortgages. A minimum down payment of at least 5% is required to take out a HomeStyle loan. However, for first-time buyers this can drop even lower to 3%. The down payment would be based on both the purchase price of the house and the renovations.
How does a HomeStyle loan work?
Borrowers can take out HomeStyle loans only from Fannie Mae-approved lenders. We can describe the process of how HomeStyle loans work through 10 steps related to being approved for this type of mortgage and how the funds are disbursed thereafter.
Step 1: Find a house that you would like to renovate or decide that you want to refinance your current mortgage to get the funds needed for renovations on the home you already own.
Step 2: Apply for a HomeStyle loan through a Fannie Mae-approved lender.
Step 3: Find a licensed contractor who you trust to help you with the renovations.
Step 4: Decide on the renovations needed and their cost with the help of a contractor or architect. You will need to submit these plans to the lender who then works with a HUD-approved consultant to determine if the costs for renovation finalized by the contractor are fair. This protects you and the lender from getting charged more than you should.
Step 5: The lender will then determine the value of your home after renovations have been conducted through a home appraisal. Typically the maximum amount you can borrow with a HomeStyle loan equals 75% of the appraised value of the house post-renovations.
Step 6: Sign the necessary documentation and close on the loan.
Step 7: Once you close on your loan, the funds to renovate are placed in an escrow account. The funds are then used for the materials needed and distributed in stages to contractors for the work done. A HUD-consultant would be needed to approve the release of the funds if the amount exceeds $35,000 or if it involves structural modifications on the house.
Step 8: Start the renovations on your house within the first 30 days of closing on your loan. The work must be completed in a 6-month period starting from the day of closing.
Step 9: The work will be checked in order to ensure that the funds are being used appropriately and the work will be finished on time. How this works is that the contractor will make requests to draw funds which the lender needs to approve of and the lender will make sure that the agreed-upon timeline of renovations is being followed.
Step 10: The lender will perform a final inspection and a re-appraisal on the property.
How much can you borrow through a HomeStyle loan?
Through a HomeStyle loan, you can borrow up to 75% of the appraised value of the house after renovations are made, also called the “as-completed” appraised value, or of the purchase price plus the renovations costs. The maximum loan amount will be whichever is lower from the mentioned alternatives.
If you are looking to purchase a manufactured house, different conditions apply. You can only borrow up to $50,000 or 50% of the “as-completed” appraised value, whichever is the lower of the two.
Qualifying for a HomeStyle Loan
Fannie Mae sets the criteria that borrowers who are interested in taking out a HomeStyle loan must meet in order to qualify for the loan. This criteria includes acceptable property types, credit scores, contractors, income requirements, etc.
- Eligible Property Types
With a HomeStyle loan you can finance most types of properties, such as for residential properties, vacation homes or investment properties. The list below shows the eligible types of properties set by Fannie Mae:
- Single-family detached home
- Condo/ Co-op Units
- One-unit second homes
- One-unit unit investment properties
- One-unit manufactured Homes
- Two, Three, or Four-unit properties
- Suitable for year-round use
- Safe, sound, and structurally secure
- A residence that’s legally real estate
- Readily accessible by roads that meet local standards
- Served by utilities that meet community standards
- Eligible applicants
Since HomeStyle loans serve to finance different types of property purchases, different groups of people are eligible to apply for it. These include:
- Individual homebuyers
- Nonprofit organization (Additional documentation is required)
- Government Agencies
- Credit Score Requirements
You will typically need a credit score of at least 620. However, depending on the size of your loan, your lender may require a higher credit score to qualify you. Therefore, you need to make sure your credit score is in shape before applying for a HomeStyle loan.
You will need to hire an approved contractor or architect to help you with the renovation of your home and to determine the costs of it. While you can also do some of the work yourself, HomeStyle loans are not intended to finance DIY projects. The work you perform yourself must not exceed 10% of the value of the house after renovation.
- Income and Debt Requirements
Another measure that lenders use to assess your creditworthiness as a borrower is the Debt-to-Income ratio. The DTI ratio shows the portion of your income that goes towards paying your debt obligations every month. The debt obligation will include the potential monthly mortgage payments that you will have to make, as well as any student loan payments, car loans, credit card bills, etc. In order to be eligible for a HomeStyle loan, you will need to have a DTI ratio of 45% at most. If your DTI ratio is 36% or less, you are more likely to be offered better terms. Therefore, if you have any outstanding debts, try to pay them off beforehand.
- Down payment requirements
You will need to pay a certain amount upfront to be qualified for a mortgage. With HomeStyle loans, this amount typically varies depending on the type of property you are looking to purchase. For example, for single-unit homes, or primary residences, you can make a down payment as small as 3% for fixed-rate mortgages and 5% for adjustable-rate mortgages. Other types of properties require the following down payments:
Property Type Minimum Down Payment Required Primary residence 3% (or 5% if it is an adjustable-rate mortgage) Manufactured home 5% (or 10% if it is a second home) Two-unit principal residence 15% Three-, Four-unit principal residence 25% One-unit second home 10%
If you do not have enough funds saved up to make the down payment for a primary residence, then you can use Fannie Mae's Community Seconds Initiative to help you cover the amount. However, since this is technically a second mortgage, you will end up owing more money.
- Maximum Loan Amount
As mentioned previously, you can borrow up to 75% of the appraised value of the home after renovations are made or 75% of the purchase price plus renovation costs, whichever amount is lower. For manufactured homes, you can only borrow the lower of either the 50% of the “as-completed” value of the home or $50,000.
In addition to this, there are some guidelines for all conforming loans by Fannie Mae and Freddie Mac that put a cap or a limit on the amount that a borrower can take from these mortgages. These guidelines can be summarized as follows:
- You can borrow a loan amount up to $548,250 if you are purchasing a single-family home
- If you are in a high-cost metro area, you can borrow up to $822,375 for a single-family home
- You can borrow up to $685,400 for a four-unit property
- If you are in a high-cost metro area, you can borrow up to $1.5 million for a multifamily home
- Mortgage Insurance
Just as with any other conventional loan, if you make a down payment smaller than 20%, you will be required to pay for mortgage insurance. However, with HomeStyle loans, borrowers do not have to pay an upfront mortgage insurance fee, and the monthly mortgage insurance rate is typically around 0.4%. Borrowers can cancel insurance once they build 20% equity in their home.
- Time restrictions
You will need to start the renovations on your home within 30 days of closing on your HomeStyle loan and the whole project must be completed within the first 6 months. Your lender will overlook the project to make sure that the timeline is being followed appropriately.
- Homebuyer Education Requirements
Fannie Mae requires borrowers who are first-time homebuyers and who have a Loan-to-Value ratio higher than 95% to go through homeownership education.
HomeStyle Loan Interest Rates
Many people believe that when a loan allows you to borrow funds to purchase a house and renovate it, it is usually going to cost you more in terms of interest rate. Thus, there is a misconception that the mortgage rate will be higher with these types of loans. However, the real reason why a borrower ends up paying more in interest is not because of the mortgage rate charged, but because of the bigger amount of funds borrowed. You are not only borrowing funds to purchase the house, but also funds to renovate it.
In fact, Fannie Mae HomeStyle loans offer slightly lower mortgage rates than other home improvement alternatives, such as home equity loans, HELOCs and personal loans. The slightly lower interest rate is sometimes also the reason why people choose to refinance their mortgage into a HomeStyle loan when they plan to do renovations on their house. Just like with conventional mortgages, HomeStyle loans are offered in 15-year or 30-year mortgage terms.
What type of renovations does a HomeStyle loan cover?
Fannie Mae allows borrowers to perform different types of home renovations as long as they are permanent to the property, will increase the property's value and will be completed within the time limit required. From painting your house to finishing your basement, you can use a HomeStyle loan for pretty much everything. Some examples of home renovations HomeStyle loans are used for include:
- Full house remodel
- Kitchen remodel
- Bathroom remodel
- New landscaping
- Basement finishing
- Building a second home on the same property
- Building accessory units
What costs can be covered by a Fannie Mae HomeStyle loan?
A Fannie Mae HomeStyle loan allows borrowers to roll over different types of costs in the loan balance besides the amount they are borrowing to purchase the house and renovate. These costs include:
- Closing costs
- Permits and license fees
- Living costs to rent a place while the home is under renovation
- Project contingency reserves
- If you are doing some DIY work, then you can borrow up to 10% of the
- After-Repair-Value to use for building materials
What a HomeStyle loan doesn't cover includes costs such as tearing down a house and building it from the beginning or building a second home on a new property. Other costs not covered by Fannie Mae HomeStyle loans include improvements that are not permanent to the property such as purchasing furniture, a movable storage shed, some types of landscaping, etc.
Pros and Cons of HomeStyle Loans
HomeStyle loans present a number of pros and cons for borrowers. It is important to go through them at first, before deciding to take out a HomeStyle Loan.
One Mortgage - HomeStyle loans provide the convenience of taking only one mortgage to finance the purchase of a house and its renovations. Borrowers don't need to take two separate loans. This means that they only have to pay for one set of closing costs, make one mortgage payment every month, and apply only once.
Refinancing - A HomeStyle loan can also be used to refinance your current mortgage and use the additional funds borrowed to do renovations in your home.
Low Down Payment - You can make a down payment as low as 3% with a HomeStyle loan if you plan to use the house as your primary residence.
Lower Interest rates - HomeStyle loans offer lower mortgage rates than other alternatives such as HELOCs, personal loans, or home equity loans.
Various types of eligible properties - HomeStyle loans are available to different groups of borrowers. You can use a HomeStyle loan to borrow for a single-unit or multifamily property, investment properties, vacation homes, manufactured homes, etc.
No Upfront Mortgage Insurance - While you will still need to pay for mortgage insurance if you make a down payment lower than 20%, you won't be charged an upfront mortgage insurance fee.
Luxury improvements - While some other types of home renovation loans restrict what kind of renovations the borrower makes, with a HomeStyle loan borrowers are permitted to undertake even “luxury” improvements on their property.
Additional Steps - The convenience of having to take only one mortgage is offset by the fact that the application process will take longer than usual since there are additional steps involved.
For example, your contractor or architect would have to submit the renovation plans to the lender and then the lender would have to approve of them.
Fewer lenders - Only Fannie Mae approved lenders can offer HomeStyle mortgages. This means that you might not get the chance to shop around as much as you'd like to.
Less time and more decisions - You would have to submit your full proposal to the lender and as soon as you close on your loan, you have to start the renovation work within the first 30 days. This means that you have to be very clear on what you want and be sure of it, because making changes to your initial plan will be an even bigger hassle.
Strict time schedule - The renovation work will have to be completed within 6 months from the time you close on the loan. This means that a strict schedule will need to be followed so that every stage of the renovation is finished on time.
Alternatives to Fannie Mae HomeStyle Loan
Borrowers who want to explore their options before deciding on taking out a HomeStyle loan, can consider the following alternatives that may be more suitable for their needs:
FHA 203(k) loan
The FHA 203(k) loan is a type of mortgage offered by FHA-approved lenders. It shares many of the same characteristics as the Fannie Mae HomeStyle loan in the sense that it allows borrowers to take out one mortgage to finance the purchase of a house and its renovation. The project with the FHA 203(k) loan will also be overseen by the lender who ensures that the funds are being used appropriately and the project will be finished on time. The biggest difference between a Fannie Mae HomeStyle loan and an FHA 203(k) loan is that the latter allows you to completely tear down a house and rebuild it from the start on the existing land.
Since they are government-backed mortgages, FHA 203(k) loans have less strict requirements for borrowers, such as a lower minimum credit score of 580. However, they also present some disadvantages such as charging upfront Mortgage Insurance Premium and higher mortgage rates than HomeStyle loans. Moreover, FHA 203(k) loans cannot be used for vacation homes or investment properties.
Home Equity Loans
With a home equity loan, a homeowner can borrow against the equity he or she has already built on the home. This means that you can only use it to repair or renovate a house that you already own and not purchase a completely new one. With a home equity loan, the borrower can borrow a lump sum only once and use these funds to conduct the home improvements. Home equity loans have slightly higher interest rates than the Fannie Mae HomeStyle loan.
A home equity line of credit is similar to a home equity loan because the homeowner is once again allowed to borrow against the equity they have built on the home that they own. A HELOC is more like a credit card, from which the homeowner can borrow funds when they need them and in the amount that they need. This type of loan is preferable when you plan to conduct a number of small projects over time and you don't want to be rushed by the time restrictions of a HomeStyle loan.