You snagged your dream home … but it’s short one bedroom or comes with a kitchen that hasn’t been renovated since microwaves were invented. You can afford the down payment plus the closing costs, but you’re worried you’ll be stuck with the 1920s kitchen for life.
Have no fear, the Fannie Mae HomeStyle® Renovation Mortgage is here! It was created for homeowners who have a conventional first mortgage, and it allows them to borrow money for renovations so they don’t have to finance their renovations using other methods.
It can be used on any project, from a bathroom renovation to the creation of a basement apartment — with loans for up to 75% of the purchase price plus the renovation costs or the appraised value. The loan can be done before the project begins, and the HomeStyle Renovation Mortgage is bundled with the home purchase so you’d only make a single monthly payment.
What are the eligibility requirements?
- Loan-to-value (LTV) ratio. The maximum loan-to-value (assessment of the risk that lenders examine prior to mortgage approval) is 97% for a one-unit principal residence, with a limit for renovation of 75% of the lesser of the appraised value upon completion or the purchase price plus the costs of renovation. For a two-unit principal residence, the maximum LTV ratio is 85%; for three- and four-unit residences, it’s 75%; and for a one-unit second home, it’s 90%.
- Credit and debt. With some exceptions, Fannie Mae’s maximum debt-to-income (DTI) ratio is 36% of your monthly income, with a maximum of 45% if you have a higher credit score and reserve requirements (see if you’re eligible here). Some exceptions to the maximum DTI ratios include cash-out refinance transactions, borrowers who don’t have a credit score, non-occupant borrowers, government mortgage loans and Fannie Mae’s Desktop Underwriter® (DU; aka loans written through Desktop Underwriter) Refi Plus and Refi Plus. To figure out your total monthly fee, add your monthly housing expenses for your main home, monthly payments on installation and revolving debts, lease agreements, alimony, if applicable, along with any net loss from a rental property.
- Property types. The key here is that the renovation has to be on something permanently affixed to the property. Manufactured housing is capped at $50,000, or 50% of the as-completed appraised value; habitable or uninhabitable homes (though teardowns are not allowed); accessory units that are detached from the primary dwelling are eligible (though another residential dwelling on the property is not); and landscaping that is permanently affixed to the property is fair game.
- Renovation specs. Got an idea for your new bathroom or finished basement? If you’re planning on obtaining a Fannie Mae loan, you’re going to have to get those plans and specifications prepared by a licenced, registered or certified general contractor or architect. Those plans should describe the work, along with details of each stage and the scheduling of every part of the job. The lender will use these plans and specs to figure out the cost of the work and determine the financing, so these specs are extremely important. The plans also will be used by the appraiser to determine the “as-completed” value of the home, post-renovation.
What are the pros and cons?
- It’s one loan. This mortgage gets combined with your home loan, so it’s easier to handle and you don’t need much cash to do your renovation.
- You don’t have to limit yourself to turn-key homes. Even if you don’t have the money for an immediate renovation, this mortgage makes it possible to purchase and renovate without worrying about the costs involved.
- It can be used for any renovation project. From a roof to a bathroom, this type of loan can be applied to any home improvement project.
- It is relatively affordable. The cost of the renovation may be approved up to 75% of the purchase price plus the costs of renovation or the finished appraised value. These rates are often lower than a home equity line of credit or a personal loan.
- It can’t be used on a teardown. This financing can only be used to renovate a property.
- Not every lender offers a HomeStyle mortgage. This may limit your ability to find a lender.
- The project may take longer. A HomeStyle loan requires you to detail your project through every stage, along with having inspectors check out the progress. This may cause delays, and the closing may take longer than a traditional mortgage. A traditional home takes about 42 days to close, according to residential mortgage industry software provider Ellie Mae, while a Fannie Mae HomeStyle Renovation closing may take slightly longer.
For whom does this loan work best?
- You want a fixer-upper. This is not for people who are moving into turn-key homes. It’s specifically for those ready to renovate their new abodes.
- You know what you want to renovate immediately. You’ve got a vision for your home before you buy it. You’re ready to execute this, you’re prepared to hire a contractor ASAP and you want to get the work started before you move in.
- Those who meet credit requirements. The HomeStyle loan is technically a conventional home loan, so in order to qualify, you’ll need to meet credit and income requirements similar to those of a traditional mortgage.
HomeStyle Mortgage vs. FHA 203(k) loan
FHA 203(k) loan: Based on national loan limits or certain LTV restrictions, whichever is less. The FHA program’s streamlined 203(k) caps funding at $35,000.
DIY Project lending reno loan cap
HomeStyle: 10% of the appraised value of the completed renovations. Plus, any reno that costs more than $5,000 will require an inspection.
FHA 203(k) loan: Requires DIYers to show proof that they’re experts in the type of renovation they’re doing. Both offer a contingency amount, in case the renovations cost more than expected.
HomeStyle: Not tied to a specific mortgage program, which means you’ll have a little more flexibility, said J.R. Duren, a personal finance analyst.
FHA 203(k) loan: Paired with an FHA loan.
Length and type of mortgage
HomeStyle: 15- and 30-year fixed mortgages plus adjustable-rate mortgages (ARMs).
FHA 203(k) loan: 15-, 20-, 25- and 30-year fixed-rate mortgages, plus 1-year, 3/1, 5/1 and 7/1 ARMs.
Alternative ways to pay for a home renovation
The Fannie Mae HomeStyle Mortgage isn’t the only option available to pay for renovation projects. Here are some alternatives:
- Home equity loans (HELs) and home equity lines of credit (HELOCs). A HELOC mortgage is like a credit card: You pay only for the amount you spend (plus interest). You can use this loan for everything from home renovations to vacations. Often, there are no fees for a HELOC, though a HEL has the same fees as a mortgage, including the application fee, title search and more. The HEL is similar to a mortgage, as it’s a loan for a specific amount, and you’d have fixed monthly payments.
- Personal loan. This can be used for anything, including a renovation. Choose this if you don’t have much equity in your home. The lender will examine your credit and income to determine the loan amount and repayment term. But this type of loan is unsecured, so it tends to carry a higher interest rate than a HEL or a HELOC.
- Credit card. The bonus to using a credit card is that you can receive rewards such as travel or cash back. These are a smart option for smaller home improvement projects, though the interest rates are relatively high.
- Savings. Because interest rates are still historically low, it may be sensible to take out a loan for a renovation, depending on your circumstances. For example, if you have equity in your home but don’t have much in savings, you may want to keep your emergency stash while taking out a loan. But if you’re planning on selling the home quickly, then you may want to use your savings because you could expect to make the money back quickly.
Conclusion. There’s a lot to consider before taking out a home renovation loan, but the good news is that you have many options, depending on your credit, your timeline and your project.
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