When there’s a limited inventory of houses on the market, buying a fixer-upper – or just renovating your current home – might be an attractive option. Renovating gives you the freedom to put your personal touch on a place, whether that means building an energy-efficient home or designing your dream chef’s kitchen.
Whether you’re buying or renovating, a Fannie Mae HomeStyle® Renovation loan may be worth considering. This loan lets you finance both a home purchase and the cost of renovations at the same time. (Or you can refinance and remodel, if you’re staying in your current home.) Below, learn more about this type of loan to see if it’s a good fit for you.
Key Takeaways:
- A Fannie Mae HomeStyle® Renovation loan helps you purchase or refinance a home that you intend to renovate.
- To qualify for a HomeStyle® Renovation loan, you must meet specific requirements, such as having a credit score of 620 and a down payment of at least 3%.
- HomeStyle® loans may offer lower interest rates compared to other financing options but can be less flexible in terms of how you can use them.
What Is A Fannie Mae HomeStyle® Loan?
Fannie Mae is a government-sponsored enterprise (GSE) that is a major backer of conforming conventional loans, which make up a majority of the mortgages in the U.S. Fannie Mae offers a variety of mortgage products, including the HomeStyle® Renovation loan.
This loan program helps borrowers purchase a fixer-upper or refinance their current home, bundling the cost of home improvements into the loan.
Unlike construction loans, which are short-term loans that only cover a home’s construction, HomeStyle® loans combine construction or renovation with the purchase or refinancing of a home.
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How Do HomeStyle® Renovation Loans Work?
HomeStyle® Renovation loans are available for borrowers looking to buy a fixer-upper as well as homeowners who want to refinance and renovate their current home at the same time. This allows borrowers to finance their home and renovations under a single loan, without needing to take on a second mortgage.
HomeStyle® Renovation Loans involve three phases: preparation, renovation and completion.
Preparation
As with a conventional mortgage, getting a HomeStyle® loan starts with shopping for and choosing a lender. Keep in mind that not all lenders offer HomeStyle® Renovation loans.
You’ll also need to choose a lender-approved contractor and create plans for your intended project. Next, you’ll submit these plans to your lender. The lender will review the plans and confirm that the renovations meet HomeStyle® requirements. If so, they’ll order an as-completed appraisal to estimate the property’s value after renovations. Your lender will use this information to calculate your loan amount.
Renovation
When you close on your loan, the funds will be put into a custodial account. Your lender will oversee the renovation process and manage any withdrawals needed for home projects. Renovations must be complete within 15 months of loan origination.
Completion
When renovations are complete, the lender will order a final inspection and confirm the title is clear. Then they’ll close the custodial account, and any remaining funds will go toward the remaining loan principal. Finally, you’ll start making monthly mortgage payments.
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at Fannie Mae HomeStyle® Renovation Loans Can (And Can’t) Cover
You can use a HomeStyle® Renovation loan for a variety of projects, but there are a few limitations.
| HomeStyle® Renovation loans can be used for: | HomeStyle® Renovation loans can’t be used for: |
|---|---|
| Repairs or restoration to roof, plumbing or painting | Tear-down and reconstruction |
| Construction of accessory dwelling units (ADUs), such as basement apartments or in-law suites | Impermanent improvements, such as furniture and non-built-in appliances |
| Additions | Paying off existing debts or getting special assessments |
| Upgraded windows | A second residential dwelling |
| Backup generators and natural-disaster resiliency projects | |
| Landscaping, as long as improvements are “permanently affixed” to the property |
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HomeStyle® Renovation Loan Eligibility Requirements
Similar to other loan types, HomeStyle® Renovation loans have several eligibility requirements. These apply to both the borrower and the property.
Borrower Requirements
- Down payment: Borrowers will need a down payment of at least 3% – and potentially more, depending on the property type and whether or not the property is a primary or secondary residence.
- Loan-to-value ratio (LTV): The LTV is the inverse of the down payment. This means the maximum LTV for a HomeStyle® Renovation loan is 97%.
- Credit and debt requirements: You’ll need a minimum credit score of 620 and a maximum debt-to-income ratio (DTI) of 45% in most cases.
Property Requirements
- Property type: You can use a HomeStyle® Renovation loan for one-to-four-unit principal residences, one-unit second homes or one-unit investment properties.
- Limits on renovation costs: With a refinance, a HomeStyle® Renovation loan can cover 75% of the “as completed” appraised home value with renovations. With a purchase, the loan covers 75% of the purchase price and the cost of the renovation or the “as completed” appraised home value with renovations, whichever is less.
- Completion time frame: With limited exceptions that must be approved, you’ll have to complete work on renovations within 15 months of the close of your loan.
- Conforming loan limits: Because these are conforming conventional loans, they have to adhere to conforming loan limits. In many areas of the country, this limit is $806,500 for one-unit homes. High-cost areas may have higher limits; for example, in New York City’s Manhattan, the current limit is $1,209,750.
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Pros And Cons Of Fannie Mae HomeStyle® Renovation Loans
Before getting a Fannie Mae HomeStyle® Renovation loan, consider these advantages and disadvantages:
| Pros Of HomeStyle® Renovation Loans | Cons Of HomeStyle® Loans |
|---|---|
| Low down-payment requirements | Higher credit score requirements compared with a FHA 203(k) loan |
| Potentially shortened Private Mortgage Insurance (PMI) payment period if renovations increase home equity | Not available through all mortgage lenders |
| Lower interest rates compared with a personal loan, home equity loan or home equity line of credit (HELOC) | Lender-approved contractor required |
| Available for a primary residence, second home or investment property | Change orders must be approved by the lender |
| Unlike a FHA 203(k) loan, can be used for building a detached accessible dwelling unit (ADU) | Homeowners may have to pay for some changes out of pocket |
Fannie Mae HomeStyle® Renovation Loan Alternatives
While HomeStyle® loans are one way to fund home renovations, there are other options that may be available to you. Here are some alternatives to consider.
Home Equity Loan
A home equity loan is a second mortgage on your home, allowing you to borrow against the equity you’ve built in it. You receive the money as a lump-sum payment and can use it for home improvements, among other purposes. Since a home equity loan is separate from your first mortgage, it allows you to hold onto a low rate if you have one.
Because your first mortgage lender gets payment priority in the event that you default, rates on home equity loans are slightly higher than they would be for a cash-out refinance.
HELOC
A home equity line of credit (HELOC) is also a second mortgage, similar to a home equity loan. However, instead of a lump sum payment, you get access to a revolving line of credit you can draw against as needed. During what’s called the draw period, you only have to pay the interest on what you spend.
Depending on the length of your HELOC, the draw period might last 5 or 10 years. After that, the repayment period begins. Because they are structured like credit cards, HELOCs tend to have adjustable rates.
Cash-Out Refinance
A cash-out refinance allows you to replace your mortgage with a larger loan and pocket the difference to use as you wish. Compared to a rate-and-term refinance, cash-out refis are riskier – and therefore may have higher rates.
However, because a cash-out refinance is a first mortgage, interest rates tend to be lower compared to those of home equity loans and HELOCs.
FHA 203(k) Loan
An FHA 203(k) loan is essentially the Federal Housing Administration (FHA)’s version of a Fannie Mae HomeStyle® loan. It’s a purchase or rate-and-term refinance with the renovation costs built in. However, contractors have to be approved by the FHA. There are also restrictions on the types of projects these loans can fund.
Freddie Mac CHOICERenovation Loan
Freddie Mac CHOICERenovation loans are very similar to HomeStyle® Renovation loans, though they allow a slightly higher contingency reserve allowance. (That means money set aside for unpredictable project changes.)
The Bottom Line About Fannie Mae HomeStyle® Renovation Loans
The Fannie Mae HomeStyle® Renovation loan is designed for those who are looking to purchase a fixer-upper or do a rate-and-term refinance with renovation costs built into the loan amount. While these loans have plenty of advantages for those wanting to renovate their home, there are eligibility requirements – for both borrowers and their properties – to consider. Luckily, if a HomeStyle® Renovation loan doesn’t work for you, there are plenty of other options, such as home equity products and cash-out refinances.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
