Buy a home and repair it with the Fannie Mae HomeStyle Loan
Renovating a home often means taking out one loan to buy and another to renovate. And at times, you may need to refinance your mortgage to repay the home renovation loan. Talk about expensive and time consuming!
A HomeStyle Renovation loan can solve this problem.
The Fannie Mae HomeStyle Loan lets you buy or refinance a home and renovate it with the same mortgage – which can save you a ton of money and hassle.
Fannie Mae's HomeStyle loan is less well known than the similar FHA 203k program. However, for many borrowers, this is the cheaper option.
Check your eligibility for a home renovation loan (March 30, 2021).
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What is the Fannie Mae HomeStyle Loan?
Freddie Mac estimates that the average age of an American house is 37 years. In some parts of the country this number rises to 51-61 years. It is therefore not surprising that many people want to renovate the home they are buying.
But home renovations can be expensive. Taking out a separate loan for repairs after purchasing the home will add to your closing costs and paperwork.
Enter the HomeStyle Renovation Loan.
FannieMae's HomeStyle program lets you buy a fixer-upper home and pay for the renovation costs with a single mortgage loan.
You apply and only close once – that means only one set of closing costs. And your mortgage and home renovation are financed at the same low interest rate.
For many, a HomeStyle loan is the best choice. However, there are other products that do the same, including Freddie Mac's CHOICERenovation and the Federal Housing Administration's FHA 203 (k) loan. So, explore your options to find out which one works best for you.
Review Your Home Improvement Loan Options (March 30, 2021)
HomeStyle loan benefits
Here's why so many are choosing the Fannie Mae HomeStyle Renovation loan:
Your down payment can be up to 3% if you plan to live at home and if this is your first time getting a fixed rate loan. In the case of prefabricated houses, apartment buildings and second / investment properties, the down payments are higher. For returning buyers, you can qualify for a 3% down payment when you combine HomeStyle with the HomeReady loan. The appraiser evaluates the house based on its future value after this The renovation work has been completed. You can carry out some of the renovation work yourself, but no safety-critical tasks that have to be carried out by licensed professionals. All work is checked for quality and the value of your work is capped at 10% of the loan amount. You can add mortgage payments to the loan balance until you move in if you cannot live in the house during the renovation. (Deadlines apply)
These are available to typical borrowers. However, there may be special conditions if you, your home or your project are atypical.
Additionally, you can bundle a Fannie Mae HomeStyle loan with other products in the Fannie portfolio including:
HomeStyle Energy – To make your home more energy efficient or more resistant to natural disasters while your renovations are complete. HomeReady – Fannie Maes mildest mortgage program with special eligibility rules for low income and / or first time home buyers
One last thing: not all mortgage lenders are approved lenders for HomeStyle Renovation. Therefore, you may have to search for candidates at the comparison shop.
How the Fannie Mae HomeStyle Renovation Loan Works
Since HomeStyle lenders are spending extra cash on home repairs, there are a few additional frameworks to jump through when obtaining this type of loan. There are safeguards in place that add extra layers to the application and renovation process.
Here are the usual steps to apply for and get a HomeStyle Renovation loan.
Find a lender and get pre-approved for a HomeStyle loan so you know you are eligible. Choose a reputable, licensed contractor and work with them to create detailed plans and schedules for the work to be done. Submit these plans to the lender who will share them with you. The appraiserThe appraiser will inspect the house and review the plans to get a "full appraisal" (what the house is worth when it's all done). Your lender will give you the maximum loan amount that you can borrow. Fannie Mae buys the mortgage (sometimes) and the lender puts the funds for the renovation in a "depository". The contractor will start work and submit requests for funds once certain milestones are met. A check is carried out at every drawing (request for funds) and the lender releases the money if everything is satisfactory The work is completed, the lender orders a final inspection and evaluation. If everything is in order, all remaining funds will be released. Finally, there is a little back room activity, including updating the ownership of the property. You now own a newly renovated house. Since the mortgage and renovations are a single loan, you only make one monthly payment to your mortgage lender
That may sound like a lot. But it's generally much cheaper and fewer administrative issues than juggling multiple credits.
Start pre-approving your mortgage (March 30, 2021)
Requirements to Obtain a HomeStyle Loan
As with any mortgage, both you and your home must meet the basic eligibility requirements for a Fannie Mae HomeStyle loan.
The requirements may vary depending on the lender. However, you need at least the following:
A credit score of 620 or better
A Debt-Income Ratio (DTI) of 45% or less
A loan-to-value ratio (LTV) of no more than 97% (based on the lower total value or purchase price plus renovation costs)
A steady job
A reliable source of income (with proof of tax returns)
In short, qualifications for a HomeStyle loan are roughly the same as qualifications for a compliant mortgage.
Even if you have less than a 3% deposit, you can qualify for the help of thousands of deposit assistance programs available across the country. These may offer grants or forgivable loans to help you meet your home buying costs.
Fannie Mae's proprietary Community Seconds program can offer eligible borrowers a loan of up to 5% of the home value to support down payments and closing costs.
Fannie Mae has a number of minimum real estate requirements that apply to the home that you are looking to buy.
Most of these are common sense, including the fact that the home must be:
A residence that is legally real estate. Suitable for year-round employment. "Safe, solid and structurally secure." "Easily accessible via roads that meet local standards." "Served by utility companies that meet community standards."
You can use the rehab portion of your HomeStyle loan to get the house up to these standards. But you need to show how in your plans.
In addition, the house does not have to be your primary residence.
Fannie Mae also provides HomeStyle Renovation loans for second homes and investment properties of one to four units. (Although borrowers' requirements for this type of property may be more stringent.)
Also note that the final loan amount, including purchase price and renovation costs, cannot exceed local compliant loan limits – which are currently capped at $ 548,250 in most areas (however, you can look up your loan limit here).
Check your eligibility for a home renovation loan (March 30, 2021).
Requirements for HomeStyle Loan Contractors
Understand that you are not the only one who has to meet Fannie Mae's requirements. You will also need to select a licensed contractor to complete the majority of the work.
You can't get a handy old buddy to do rehab for you – unless he or she meets Fannie's standards.
According to Fannie Mae, your mortgage lender needs to determine that your contractor:
“Qualified and experienced, has all the requisite qualifications required by the state, is financially able to perform the tasks required to complete the renovation on time, and is committed to indemnifying the borrower for any property damage or damage caused by its employees or subcontractors compensate ”
This shouldn't be a problem for most reputable, licensed professionals. However, it can be helpful to choose one that has already gone through the HomeStyle process.
Choosing a contractor who is already familiar with the HomeStyle loan process can be of great help.
If you employ a contractor who is already familiar with the HomeStlye process, they already know how to finalize their plans, schedule, and cost estimate as per Fannie's requirements. This can help the process go more smoothly and complete your renovation work without setbacks.
Permitted do-it-yourself work
Unlike some rehab loans, Fannie puts few restrictions on how you can spend the renovation funds. With the exception of kitchen appliances, however, it states that "improvements should be made permanently to the property".
For example, you can add a swimming pool and recreational structures to your yard, if allowed by local zoning regulations.
The improvements shown in your plans must convince the appraiser that they add enough home value to justify the loan.
However, there are no formal spending caps beyond the general rule that your rehab cannot cost more than 75% of the total estimated value of the home.
The construction costs for the HomeStyle renovation are a maximum of 75% of the total value
For example, you are planning a possible $ 350,000 value for a Fixer upper. Most of what you can spend on a renovation to get it there would be $ 262,500. This is quite a generous amount of construction, considering that most FHA 203,000 loans max out at $ 30,000 in hard construction costs.
There is one caveat, however. they can not Break down the existing structure, then build a new one. If you want to build a brand new home, you will need a new construction loan.
Fannie Mae HomeStyle versus FHA 203k
The FHA 203k mortgage is another popular rehabilitation loan from the federal housing administration.
Both loans accomplish the same thing: they allow you to buy a home and renovate or remodel it within a single mortgage. There are a few key differences, however.
Allow credit scores of 580 or better. That's less than Fannie's minimum score of 620. However, some mortgage lenders may require higher scores on both loansA minimum deposit of 3.5% is required. Slightly more than Fannie's 3% minimumHave a maximum debt ratio of 43%. That's a little stricter than Fannie's 45%Put stricter limits on the types of renovations you can do. No luxury home improvement such as pools, tennis courts, or landscaping are allowedRequire ongoing mortgage insurance premiums until you sell or refinance. With Fannie, you can fall off the hook when your mortgage balance hits 80% of your home's market valueLower maximum construction costs With FHA "Limited" 203,000 – the "simple" version of this loan – around $ 30,000 is allowed. If you need more, you need the full 203,000 which are more complex and offered by fewer lendersDon't let the work do it yourself
If your credit rating is in the "good" range, you might be better off choosing the Fannie product. If you have the time, you can work on improving your score before you apply.
However, if your credit score is on the lower end of the spectrum, the FHA 203k loan might be your best bet.
Even borrowers with a score around 620 (Fannies Minimum) with a low down payment might find an FHA loan cheaper as it could have lower mortgage insurance costs.
Check Your FHA 203k Loan Eligibility (March 30, 2021)
Fannie Mae HomeStyle vs Freddie Mac CHOICERenovation
It's hard to see a significant difference between Fannie Mae's HomeStyle and Freddie Mac's CHOICERenovation loan.
Originally, Freddie allowed extra work to increase a home's resilience to natural disasters. And it still does. But Fannie offers the same when you bundle your HomeStyle Renovation mortgage with a HomeStyle Energy mortgage.
And Freddie is different in another way. It allows you to use your "sweat capital" (materials or labor provided by a borrower prior to closing) to reduce your down payment. However, it is up to the reviewer to rate and rate your contribution.
However, for most borrowers, there is little difference between Fannie and Freddie's rehab products.
Either of these could be a good option and the better choice for you will likely depend on what is offered by local lenders and which one offers the better interest rate.
Review Your Home Improvement Loan Options (March 30, 2021)
Other loan options for home renovation
The HomeStyle, 203k, and CHOICERenovation loans aren't your only home improvement options.
If you already own your home and feel like it's time to upgrade – possibly a kitchen remodel or a new pool – you may be able to finance the cost with home equity.
Depending on your current home equity and the value of your home, you may be able to use one of three options:
A payout refinancing – If today's mortgage rates are below your existing rate, a Disbursement Refinancing This could be a great way to develop home equity capital as you could lower your interest rate at the same timeA home equity loan – This is a fixed rate “second mortgage” that allows you to develop your home equity without affecting your existing mortgage. It could be a good option if your home is almost paid off or you already have a low mortgage rateA home equity line of credit (HELOC) – This is usually a revolving line of credit with a floating rate of credit that you can retrieve, repay and reuse when you need it. Like a home loan, a HELOC is a "second mortgage" secured by your home
Each of these strategies have advantages and disadvantages – too many to cover here. However, if you are interested in home equity financing, see this article for more information on your options.
Fannie Mae HomeStyle FAQ
Which Lenders Offer the HomeStyle Loan?
Not all lenders offer HomeStyle mortgages. But there are many. So look around as usual to find the best deal.
What is the maximum HomeStyle renovation loan amount?
You can spend up to 75% of the total estimated value of the home on renovations. The mortgages themselves are only limited by the usual credit limits. In most of the United States, that's $ 548,250 in 2021. However, higher limits apply in areas with high property prices, above $ 820,000 in some property markets.
What is the interest rate on a HomeStyle loan?
The interest rates are similar to other compliant loans. Usually, just because you have a rehab loan, you shouldn't pay more. And as with all Fannie Mae loans, your creditworthiness and down payment will affect your mortgage rate. So if you work on improving these before you apply, you can get a better deal.
What is the Pass Score for a HomeStyle Home Improvement Loan?
It's Fannie's Standard 620. However, individual lenders can set their own minimums so some may want higher scores. Shopping spree!
What is the minimum deposit for the HomeStyle program?
You can only save 3% as long as you buy a house with a unit to live in and get a fixed rate loan. You also need to be a first-time buyer unless you combine the HomeStyle loan with the HomeReady option. The minimum waste used to be 5% and some sources still incorrectly suggest it.
Do I have to be a first-time buyer to take advantage of the Fannie Mae HomeStyle Loan?
No. Current homeowners can also take advantage of the Fannie Mae HomeStyle loan. Many choose to refinance them so they can upgrade their existing home.
Can I refinance myself with a HomeStyle loan?
You bet! If your existing home needs a serious refresh, a Fannie Mae HomeStyle loan can help you convert it.
Can I use a HomeStyle loan on an investment property?
Yes, at least in theory. However, the Fannie Mae Regulatory Authority (FHFA) recently limited the number of investment mortgages it can lend. And since then, they have been harder to come by – and more expensive.
Can I use a HomeStyle loan on a vacation home?
The same upper limit mentioned in the last FAQ also applies to holiday homes. So technically the answer is yes – but you may have to work harder to find a loan. And you might find that you are paying a higher mortgage rate.
Is the FHA 203 (k) Loan Better Than the Fannie Mae HomeStyle Loan?
A 203,000 loan might be better if your FICO score is below Fannie's 620 threshold. The minimum of the FHA is 580.
How do I apply for a HomeStyle loan?
Once you have chosen a lender, you will use and follow the procedures outlined in the "Step by Step" section above. Obviously, you'll want to shop around to make sure you are getting the best mortgage deal. However, since not all lenders offer HomeStyle loans, you will need to shop a little more than usual to find the three or more to get quotes from.
Check your new plan (March 30, 2021)