Fixing up a home is expensive. If you want to do it right after purchasing a home, it might not be a possibility for you after you make your down payment and pay the closing costs. One option you can utilize if you qualify for conventional financing is the Fannie Mae HomeStyle Renovation Mortgage. This program gives you the money to purchase and fix up a home in one loan. You can also use it to refinance your existing mortgage if you want money to fix up your home. This flexible mortgage product helps you make a home look just how you want.
How the HomeStyle Renovation Mortgage Works
The HomeStyle Renovation Mortgage is not a traditional cash-out loan. You do use the equity of the home based on the future appraised value to fix it up; however, you cannot receive cash in your hand. Any funds taken out of the equity of the home are for the renovations. The lender applies any cash left over towards the principal of the loan. In some cases, you can use the money to reimburse any costs you can prove for supplies or renovations you paid for out of pocket.
Once you close on the home, the lender disburses the appropriate money to the seller or current mortgage lender. This releases any liens on the property. From there, the lender puts the remaining funds in an interest-bearing escrow account to pay for the remodeling or repair expenses. The lender then disburses the funds according to a prearranged schedule. The lender bases disbursement on the plans and specifications prepared by the contractor himself or a licensed architect or consultant. The plans should include full details of the work they will complete as well as a timeline of completion of each phase.
Choosing the Contractor
It is up to you, the borrower, to choose the contractor. The lender does oversee the process, though. It is the lender’s job to ensure the contractor has:
- The right amount of experience
- Proper licensing and insurance
- Possess proper supplies and materials to complete the jobs
- Has the ability to secure any necessary permits
It is up to you to find and secure a contractor; the lender will need to approve the contract between the two parties. The lender has specific guidelines from Fannie Mae to follow to ensure the contractor you chose meets the Fannie Mae requirements.
Doing the Work Yourself
If you are a handy person, you might want to do the work yourself in order to save money. Fannie Mae is very strict about who can perform their own repairs, though. This is only a possibility on one-unit properties and you must occupy it as your primary residence. In addition, the cost of the work cannot total more than 10% of the repaired value of the home. The lender can only allow reimbursement on any materials or contract labor which you can prove with appropriate documentation. If any repairs total more than $5,000, an inspection is necessary before any funds are released.
Types of Homes
As with any other Fannie Mae product, there are specific guidelines based on the type of home you plan to renovate. In general, you can use the funds to fix up a primary residence, second home or investment property. If you do use the funds for a second home or investment property, however, it can only be a single unit property – multiple units are not eligible under this program unless it is a primary residence.
Maximum Loan-to-Value Ratios
The loan-to-value ratios are rather forgiving with the HomeStyle Renovation Mortgage. If you use the funds to purchase a home, you can borrow up to 95% of the completed value of the home. This means the value after the repairs or renovations if it is a one-unit property. If there are multiple units, the following LTVs prevail:
- 2-units 85%
- 3-4 units 75%
- 1-unit second homes 90%
- 1-unit investment properties 85%
These limits pertain to fixed rate loans. If you choose an adjustable rate loan, the maximum LTVs are slightly lower:
- 1-unit owner occupied 90%
- 2-units 75%
- 3-4 units 65%
- 1-unit second homes 80%
- 1-unit investment properties 75%
Types of Work Allowed
There are many different repairs and renovations which Fannie Mae allows for this program. Fannie Mae states that the changes must directly and positively impact the value of the property and they must be permanent. Fannie Mae does not require any alterations to the planned changes as long as you can ensure their compliance with the above requirements. The only exception to this rule is with any energy efficient changes. Fannie Mae requires an Energy Report to determine if the changes are worth the cost.
The total amount of the costs to renovate or repair the home cannot total more than 50% of the future value of the home as determined by the appraiser. This includes the following:
- Cost of materials
- Cost of labor
- The 10% contingency reserve to cover any unexpected expenses
- Money to cover up to 6 months’ worth of principal, interest, taxes and insurance if you are not able to live in the home while the contractor completes the work
The Timeline
The renovations can begin 3 days after you close on the HomeStyle Renovation Mortgage. The contractor/you have 12 months to complete the work. The contract, which the lender approved before you closed, must be closely adhered to in order for the lender to disburse the funds. The contractor can make a request for funds as necessary, but will have to provide adequate proof regarding why he needs the funds and how he will use them. The lender can make the final disbursement after the completion of the HomeStyle Completion Certificate or the appraiser completes an Appraisal update to verify the new value of the home.
Qualifying for the HomeStyle Renovation Mortgage
In order to qualify for the HomeStyle Renovation Mortgage, you should meet the following requirements:
- At least a “good” credit score
- Possession of ample reserves
- Stable employment
- Stable income
- Verifiable income
- Low debt ratio – 28/36 is the maximum
These are the basic Fannie Mae guidelines, but every lender differs with their requirements. You can shop around with several lenders to see who offers the best program with the lowest fees and interest rates.
The HomeStyle Renovation Mortgage enables you to purchase/refinance and fix up a home with one loan. This is advantageous over having two separate loans which require more closing fees, higher interest rates and more headaches down the road. If you have good credit and other compensating factors, this renovation loan is worth looking into for your renovation needs!
