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Updated on Wednesday, February 6, 2019
It’s one thing to buy a brand new house with top-notch appliances. But what happens when the house you have your eye on is older and needs major repairs? You may not have the money to buy the house and then turn around and make all of the renovations. However, a Fannie Mae HomeStyle® Renovation mortgage could be the ideal solution to meet your needs.
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The Fannie Mae HomeStyle Renovation mortgage covers the cost of financing a home purchase while also including money for making major improvements. It essentially gives homeowners a way to finance improvements without taking out a second mortgage, using credit or applying for another type of loan. That means you can avoid multiple bill payments, since your single mortgage payment will cover the costs of your repairs.
What are the eligibility requirements?
Lenders look for a number of things when determining who to approve for a HomeStyle Renovation mortgage, and for how much.
Your financial situation
Credit score. If you apply for a HomeStyle Renovation mortgage, you must have a minimum credit score of 620 to be approved, though you may be able to finance a higher amount with a higher credit score.
Debt-to-income ratio (DTI). Your debt-to-income ratio — your monthly debt payments divided by your monthly income — can’t be over 45%, meaning no more than 45% of your income can be used to make debt payments (including your mortgage payment).
Type of property
Another factor that will come into play is your loan-to-value ratio. Your loan-to-value (LTV) ratio measures the amount you’ll be financing in relation to the property’s total value. LTV ratio requirements are different for different types of properties and mortgages.
Principal residence. HomeStyle Renovation mortgages are available for principal residences that have one to four units.
- Single unit. If you have a one-unit principal residence with a fixed-rate mortgage, the maximum LTV ratio for a HomeStyle Renovation mortgage is 97%, meaning a lender will finance up to 97% of the property’s value. You would have to come up with the other 3% as a down payment.If you have a one-unit principal residence with an adjustable rate mortgage, the maximum LTV ratio is 95%. You would need a 5% down payment.
- Multiple units. You can get HomeStyle Renovation loans for buildings with multiple residential units that serve as a principal residence. The LTV limits vary depending on how many units the property has.
- Two units: LTV ratio limit is 85%
- Three or four units: LTV ratio limit is 75%.
- Manufactured houses. Manufactured homes — those built in a factory and placed on a property — are also eligible for HomeStyle Renovation mortgages. However, funds available for manufactured houses are limited to the lesser of $50,000 or half of the appraised value after renovations are complete.
Investment property. You can get a HomeStyle Renovation mortgage for one-unit second homes or investment properties. In that case, the LTV ratio limit is 90%.
Borrowing for other costs
Some borrowers may be able to take advantage of a 105 LTV ratio limit, meaning they can get up to 105% financing. To qualify, you would have to go through a mortgage program called Community Seconds®, which lets you use funds from certain entities, including federal, state or local agencies; non-profit organizations; and employers to pay for the down payment and closing costs.
When it comes to the renovations themselves, there are a few stipulations.
Contractors. If you use a contractor for renovations, you must use a licensed contractor unless licensing isn’t required by state or local law.
“The bank wants to protect you, since they are basically your partner,” said Peter Grabel, managing director of Luxury Mortgage Corp., in Stamford, Conn. “They want to make sure your builder has a resume.”
DIY renovations. If you want to do the repairs yourself, the property must be no more than one unit and it can’t be a manufactured house. For do-it-yourself projects, the renovation costs are also limited to no more than 10% of the house’s value after the renovations are complete.
Project length. Any renovations made must be permanent changes to the house and they must be completed within 12 months of the mortgage’s closing.
Costs. Finally, renovation costs can’t be more than 75% of either
- The lesser of the appraised value of the house, including the renovations, or
- The purchase price of the house along with the cost of renovations.
Pros and cons of a HomeStyle Renovation mortgage
Everything has its benefits and drawbacks. HomeStyle Renovation mortgages are no different.
Here are some reasons why this type of mortgage may be a good choice for you.
- You can finance the house and pay for repairs using one loan. With one loan, you only have to be approved once and you only have to pay lenders’ fees and other loan origination costs one time.
- You can refinance an existing loan. If you live in a house that needs repairs, refinancing it into a HomeStyle Renovation mortgage can free up cash to do the necessary work. If you currently have a high mortgage rate, you may be able to get a lower rate by refinancing.
- You have more housing options to choose from. Many buyers find it challenging to locate the house that fits their desires and their budget. In fact, in June 2018, resale housing inventory was at its lowest level in over 18 years, according to data analytics company, CoreLogic. HomeStyle Renovation mortgages give you the option of considering houses that may need major improvements.
You should also consider the disadvantages of a HomeStyle Renovation mortgage.
- The process can be more complex than other loans. Lenders require borrowers to have contractors draw up and submit detailed plans and specifications about what work will be done and how long it is expected to take.
- Lenders must approve the contractors you hire. That step could prolong the project.
- HomeStyle Renovation mortgages may be harder to find. Lenders must be approved by Fannie Mae to offer HomeStyle Renovation mortgages, so the loan may not be as readily available as other loan products.
- There are limitations on what borrowers can do. For example, borrowers cannot use the HomeStyle Renovation mortgage to completely demolish a house and rebuild it.
The HomeStyle Renovation mortgage won’t be for everybody. However, if you have your heart set on a house that needs major improvements and you have a vision for the type of work you’d like to see done, it could provide the flexibility that you need.
HomeStyle Renovation mortgages vs. 203(k) rehabilitation loans
HomeStyle Renovation mortgages aren’t your only option for financing home improvements in one mortgage. The Federal Housing Administration’s (FHA) 203(k) rehabilitation loan does the same thing. Here’s a brief look at how the two loans stack up.
|HomeStyle Renovation Mortgages Compared to FHA 203(k) Rehabilitation Loans|
|HomeStyle Renovation mortgage||203(k) rehabilitation loan|
|Minimum down payment||3%||3.5%|
|Eligible properties||One- to four-unit residences; investment properties allowed||One- to four-unit residences; investment properties ineligible|
|Eligibility requirements||Borrowers must have minimum credit score of 620 and debt-to-income ratio no higher than 45%||For maximum FHA financing, borrowers need a 580 credit score. Lenders also look at income, assets and debts|
|Timeframe for completion of repairs||12 months after the loan closes||Six months after the loan closes|
|Contractor requirements||Contractors must be licensed if required by state law||Borrowers must hire 203(k) consultants for Standard 203(k) loans|
Alternative ways to pay for major renovations
In addition to all-in-one mortgage loans, there are other options you can explore for financing major home renovations.
Borrow against your home equity
You may be able to pay for renovations by borrowing against the equity in your house through either a home equity loan (HEL) or a home equity line of credit (HELOC). In either of these scenarios, you are using your house as collateral, so if you default on the loan, you could lose your house.
Home equity loans typically come with a fixed interest rate, while HELOCs typically come with a variable interest rate. If you choose either of these methods, you may also have to pay upfront fees or closing costs.
Using a personal loan for home improvements would be safer than a HEL or HELOC in that you wouldn’t be using your house as collateral. Before choosing this option, make sure you have an understanding of the interest rate and the amount you’ll be expected to pay each month for the life of the loan. In general, personal loans have higher interest rates than HELs or HELOCs, but lower rates than most credit cards.
You can use credit cards to finance major improvements, particularly if you can get a low or 0% intro rate. For example, some card issuers will offer 0% interest on charges for a promotional period of time. The longest promo period right now is 21 months.
If you can make sure you pay off the credit card in that timeframe, this may be a good way to go. However, if you can’t, keep in mind that credit card interest rates tend to be higher than other types of loans. In January 2019, the average credit card interest rate was more than 17%.
If you have a lot of savings, you may be able to use it for renovations. However, think carefully about whether you would be better off using that money for something else. For example, you want to have an ample emergency fund to handle unexpected expenses. Also, make sure you’re saving for retirement and other financial goals.
Some of the most beautiful homes at one time required a good deal of work. If you think you’ve come across a diamond in the rough, a HomeStyle Renovation mortgage can help you make the repairs necessary to bring your dream house to life. However, before moving forward, make sure you do your research and weigh your options so you can finance the renovations in a way that will be most advantageous to you.
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