A smart solution for home renovations
Homeownership is one of the greatest milestones for many, but what happens when the dream home needs some TLC? Not all homes are move-in ready, and sometimes a property requires renovations to suit personal tastes, functionality, or modern standards. This is where Fannie Mae’s HomeStyle Renovation Mortgage comes into play, offering a flexible and affordable solution to buyers and homeowners alike who wish to make improvements or upgrades to their homes.
In this blog, we’ll explore what the HomeStyle Renovation Mortgage is, how it works, its benefits, eligibility requirements, and how it compares to other renovation loan options.
What is the Fannie Mae HomeStyle Renovation Mortgage?
The Fannie Mae HomeStyle Renovation Mortgage is a conventional mortgage that allows homeowners or homebuyers to finance both the purchase or refinance of a home and the cost of renovating it into one single loan. Unlike some other renovation loan programs, this product is designed for a wide range of property types and renovation needs.
Essentially, it combines the traditional benefits of a conventional mortgage (lower interest rates, fewer restrictions) with the ability to fund home improvements, making it an ideal option for those who wish to purchase a fixer-upper or renovate their current home.
How does the HomeStyle Renovation Mortgage work?
The HomeStyle Renovation Mortgage works similarly to a regular mortgage, but with additional provisions for financing renovation costs. Here’s a general breakdown of how it works:
1. Loan approval
Homebuyers or homeowners applying for the loan will go through the usual approval process, which includes a credit check, income verification, and an assessment of the home’s value.
2. Renovation plan
Once the borrower is approved, they will submit a detailed renovation plan. The plan should include contractor bids, a cost breakdown, and the scope of work.
3. Property appraisal
The lender will conduct a property appraisal based on the projected value of the home after the renovations are completed. This value takes into account both the current value of the home and the improvements.
4. Renovation funding
The renovation funds are held in an escrow account and disbursed to the borrower or contractor as work is completed. Borrowers will typically be required to submit receipts and proof of work before the funds are released.
5. Mortgage payment
The borrower will make monthly mortgage payments based on the total loan amount (the cost of the home plus renovation expenses). Once the renovation is complete, the home will ideally have a higher market value, and the homeowner can enjoy the benefits of their improvements.
Key features and benefits of the HomeStyle Renovation Mortgage
The HomeStyle Renovation Mortgage offers several unique features that make it a favorable choice for many homeowners:
1. Versatility
This loan can be used for nearly any type of renovation, from cosmetic changes like painting and flooring to structural improvements like adding a new room or modernizing plumbing and electrical systems. It can also cover luxury upgrades, such as swimming pools or landscaping.
2. Single loan, single payment
One of the major advantages of the HomeStyle Renovation Mortgage is that you don’t need to take out multiple loans for your home purchase and renovation. You finance both the property and the improvements with a single loan, which means just one mortgage payment.
3. Competitive interest rates
As a conventional loan, the HomeStyle Renovation Mortgage offers competitive interest rates. It typically comes with lower rates than FHA 203(k) loans and can be less expensive overall for borrowers with good credit.
4. No maximum renovation limit
Unlike some other programs that place a cap on the cost of renovations, the HomeStyle Renovation Mortgage has no strict upper limit. However, the total loan amount must still comply with the conforming loan limits set by the Federal Housing Finance Agency (FHFA) based on your location.
5. Cash reserves
Lenders may require the borrower to have a cash reserve to cover the costs of any potential issues that arise during renovations.
6. Property types
It is available for a wide range of property types, including single-family homes, townhouses, and condos. Even investment properties are eligible in some cases.
Eligibility requirements
While the HomeStyle Renovation Mortgage is more flexible than many other renovation loans, there are still specific eligibility requirements:
Credit score: Generally, borrowers need a minimum credit score of 620, although some lenders may require a higher score for larger loan amounts or more extensive renovations.
Down payment: A down payment of at least 3% to 5% is required, depending on the loan type (e.g., primary residence vs. second home or investment property). If the loan is for a primary residence, the down payment is typically 5%.
Income verification: Borrowers must provide proof of income and assets to demonstrate their ability to repay the loan. This includes pay stubs, tax returns, and bank statements.
Property eligibility: The property must be a primary residence, second home, or investment property, and it must meet Fannie Mae’s guidelines for property condition. If the property is severely damaged, it may not be eligible for the loan.
HomeStyle Renovation Mortgage vs. FHA 203(k)
There are other renovation loan options available, such as the FHA 203(k) loan, but the HomeStyle Renovation Mortgage has several advantages.
More flexibility: The FHA 203(k) loan is limited to owner-occupied homes, while the HomeStyle Renovation Mortgage can be used for primary homes, second homes, and investment properties.
Lower upfront costs: HomeStyle Renovation Mortgage requires a lower down payment (as low as 3%) compared to FHA 203(k) loans, which require a 3.5% down payment. However, FHA loans may have slightly lower interest rates for those with lower credit scores.
Fewer restrictions: The FHA 203(k) loan imposes more restrictions on the types of renovations allowed, and it requires the use of FHA-approved contractors. On the other hand, the HomeStyle Renovation Mortgage allows for more types of improvements and doesn’t impose these restrictions on contractor selection.
Conclusion
The Fannie Mae HomeStyle Renovation Mortgage provides an excellent option for homebuyers and homeowners looking to finance both the purchase or refinance of their home and necessary renovations. With its competitive interest rates, flexible renovation possibilities, and the convenience of a single loan and payment, it offers a great alternative to traditional home improvement financing options.
Whether you’re looking to buy a fixer-upper or simply upgrade your current living space, Mortgage Equity Partners expert team of loan officers can help you achieve your dream home.
Happy home renovating!
