The HomeStyle loan is a mortgage program introduced by Fannie Mae designed to help borrowers buy a home as well as finance home improvements and remodeling costs into one loan. It’s very similar in nature to the FHA 203(k) loan yet much more flexible. Buyers who want to renovate a home or make home improvements on an existing property, they often must obtain a construction loan to make the improvements. Once the project has been completed, the construction loan must then be replaced by a traditional, permanent mortgage. Construction loans are short term in nature, typically for as long as the renovations take place. The HomeStyle loan eliminates the need for two separate loans, the construction and permanent. How does the Fannie Mae HomeStyle renovation loan work and what are the basic guidelines?
Let’s say you find a “diamond in the rough” that with just a little bit of TLC you could significantly increase the value of the home once the renovations have been completed. You visit the home with a licensed contractor who will inspect the home and make suggestions regarding what needs to be fixed in addition to your own personal improvements such as a new kitchen, an updated master bath or an added bedroom. You will obtain an estimate of the costs needed from your inspector as well as a licensed contractor.
Appraisal for a HomeStyle Loan
For the HomeStyle loan, your plans must be drawn up by a licensed contractor, architect or an approved renovation consultant. Once your loan has been submitted to your lender, the lender will then order an appraisal. The appraisal will address the sales price of the home but more importantly will calculate an appraised value based upon the renovation work having already been completed. The HomeStyle loan allows for up to 50 percent of the “as completed” value to be financed.
For example, if you buy a home for $250,000 the maximum amount borrowed specifically for renovation costs cannot be more than 50% of the final value of $400,000. In this instance, the maximum renovation costs would be 50% of $400,000, or $200,000.
Down Payment Requirements
Typical down payment requirements for Fannie Mae loans apply which means you can put down as little as 5.0% of the as-completed value when obtaining a fixed rate loan or 10% down with a hybrid or variable rate loan. The HomeStyle loan program can also be used to finance a duplex, three or four-unit property as long as you intend to occupy one of the attached units. For a duplex, you’ll need a 15% down payment for a fixed rate loan and 25% down with a variable. For a three to four unit property, you will need a 25% or 35% down payment, based upon the type of loan, fixed or variable.
Unlike the FHA 203(k) loan, the HomeStyle loan program can also be used to finance a second home or investment property, following the additional down payment guidelines.
Financing for a HomeStyle Loan
What can be included in the loan amount? The HomeStyle loan allows for any repairs or renovations as long as the additions add value and are permanently affixed to the home. You can even include the costs associated with installing a new in-ground pool.
You can also include most closing costs into the loan amount in addition to the funds needed for renovation work. Such allowable closing costs can include:
- Property Inspection
- Title Work
- Architectural Plans and Specs
- Engineering Fees
- Licensed Consultants
- Fund Control
The HomeStyle loan can be used both for a purchase as well as refinancing an existing property you own and the renovations must take place within six months from the initial funding of the loan.
Credit requirements for the HomeStyle loan are also very favorable and similar to most any conventional loan. For those who finance an owner-occupied property, the minimum credit score must be 620 although some lenders can adjust that upward should they choose. For those financing a second home or a rental property, the minimum credit score is 700.
Is a HomeStyle Loan a Good Fit?
The Fannie Mae HomeStyle loan doesn’t get much as much attention as it should and that’s a shame because in the right situation it’s an ideal product. Interest rates for the program are extremely competitive and there is only one loan that is closed. No need for a construction loan and a replacement mortgage. If you’ve been thinking of buying a “fixer upper” you really need to take a closer look at this program.