What Is the Fannie Mae HomeStyle Renovation Loan?
The Fannie Mae HomeStyle® Renovation Loan is a great option for homebuyers and homeowners to roll the cost of renovating a fixer-upper home into one loan. The HomeStyle loan program is more complicated than a traditional home loan, and understanding how it works will help you decide if it’s the right remodeling mortgage for you.
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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.
A HomeStyle loan may save a purchase transaction that might otherwise fall apart if a seller is unwilling or unable to make buyer-requested repairs. 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. This conventional renovation loan allows you to:
- Make a down payment as low as 3%
- Borrow a loan amount based on home’s estimated value after renovations
- Finance the fix-up costs for one- to four-unit homes, investment properties, condos and manufactured homes
- Renovate a home you’re buying or you already own
- DIY is allowed
- Roll mortgage payments into the loan if you can’t live in the home during renovations
- Pick your own licensed contractor
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 below). Extra steps you need to take to be approved for a HomeStyle loan include:
- Finding a contractor. You can choose any qualified contractor to complete your project. Licensing is only required if your state requires it.
- Providing 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.
- Disclosing 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.
- Deciding how much you’ll need 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.
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- Contingency reserves are usually optional and based on a percentage of your total project costs to cover overrides for labor and material. 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.
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. The maximum debt-to-income (DTI) ratio is 45%.
ACCEPTABLE PROPERTY TYPES
You can renovate a one- to four-unit primary home, condo or co-op, planned unit development (PUD) or manufactured home. 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.
LOAN-TO-VALUE RATIO
A loan-to-value (LTV) ratio measures the amount you borrow compared to your home’s value by dividing your loan amount by the home’s appraisal value. The table below reflects how much down payment or equity you’ll need to take out a HomeStyle renovation loan depending on the type of home you’re financing and whether you live in the home full time or not.
| Property type | Occupancy | Purchase down payment/refinance equity requirement |
|---|---|---|
| One-unit | Primary | 3% |
| Two-unit | Primary | 15% |
| Three- and four-unit | Primary | 25% |
| One-unit | Second home | 10% |
| Manufactured home | Primary Second home | 5% 10% |
| One-unit | Investment property | 15% |
| One-unit | Investment property | 25% |
APPRAISED VALUE
Lenders typically use the “as-is” or the current value of your home for a mortgage. Renovation 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 $300,000, you’ll normally be limited to borrowing $291,000 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 $339,500 if the “as-completed” appraised value is $350,000.
ACCEPTABLE TYPES OF RENOVATIONS
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.
LENGTH OF TIME TO COMPLETE
Renovations must be completed within 12 months from the date your loan closes.
HomeStyle loan pros and cons
| Pros | Cons |
|---|---|
| You can buy and fix up a home with one loan | You’ll provide more paperwork than a regular loan |
| You can refinance and renovate with one loan | You’ll need to shop for lenders that offer renovation loans |
| You can renovate a primary, vacation or investment home | You’ll need to meet stricter qualifying requirements than government-backed fixer-upper loans |
| You may be able to roll in monthly payments if you can’t live in the home | You must find a contractor and get plans for the renovations |
Alternatives to the HomeStyle renovation loan
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 for home improvements.
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. 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.