Homestyle Loan: A Better Way to Finance Your Renovation

Roll in the rehabilitation money into a purchase or refinance mortgage!

Run down house before rehabilitationI admit, I was a 203k snob, but after reviewing the HomeStyle remodeling guidelines, I've concluded that it is the superior renovation loan program. Of course, there are instances in which the FHA 203k program is better.

For example, the 203k program permits tear-downs, the HomeStyle program does not. While the Homestyle program allows for luxury improvements, the 203k loan does not.  So let's take a look at the HomeStyle renovation mortgage.

The HomeStyle Renovation mortgage is a purchase-plus-renovation loan designed for property buyers or homeowners looking to renovate or repair their existing home.
Additionally, investors and second houses are eligible.

Any kind of renovation or repair is considered acceptable, as long as it is permanently attached to the property. Renovations must be completed within twelve months of the loan being delivered to Fannie Mae.

A 3% down payment is required for first-time home purchasers who acquire a single family house for personal occupancy and finance it with a fixed rate mortgage.

The HomeStyle Renovation mortgage allows borrowers to finance up to 75% of the property's as-completed assessed value through a single mortgage, rather than a home equity line of credit, second mortgage, or some other more costly financing alternative.

HomeStyle Loan Eligibility

Homebuyers, investors, charitable groups, and local governments are all eligible borrowers.

Fannie Mae Homestyle Loan Income Limits

There are no minimum or maximum income requirements in general, but the borrower's income must be adequate to meet traditional debt-to-income ratio standards.

Non-first-time home purchasers must earn less than 80% of the median income in the property area to qualify for the 3% down payment.
Otherwise, a 5% down payment is required.

Debt-to-income ratio: A debt-to-income (DTI) ratio of more than 45 percent is not permitted. If the applicant has student loan debt and the payment amount is shown on the credit report, the payment amount may be used to qualify.

If the lender does not receive a payment amount from the credit report, the lender may use either 1% of the outstanding student loan total or a calculated payment that completely amortizes the loan based on the loan's recorded repayment conditions.

If you're unfamiliar with the phrase debt to income, it's a basic ratio that compares the applicant's monthly GROSS income to his or her monthly debt. The debt limit on the Home Style Renovation mortgage is 45 percent.

In other words, the monthly debt should not exceed 45 percent of the applicant's total monthly income.

Eligible Property Types

The subject property may be a primary residence with one to four units, a second home with one unit, or an investment property with one unit.

There are no restrictions on fee simple ownership, co-ops, condos, or planned unit projects. Renovations to a condominium or co-op unit must be restricted to the unit's interior.

Manufactured housing is permitted, but repairs, restorations, and upgrades must not exceed $50,000 or 50% of the appraised value “as completed.”

When the subject property is a co-op unit or condominium, the proposed project must either be approved by the homeowners' association or co-op company's bylaws or have gained official permission from the homeowners' association or co-op corporation.

Loan Term

Fixed-rate mortgages of 15 and 30 years, as well as all qualifying adjustable-rate mortgages.

Fannie Mae Homestyle Loan Down Payment

The down payment is calculated on the sales price plus the rehabilitation amount and then multiplied by the down payment percentage.

For example:
Down payment—Sales price ($200,000) + rehab amount ($100,000) = $300,000 X 3% = $9,000 (First time home buyer)

  • First time home buyer & non-first time home buyer who meet the HomeReady guidelines—3%
  • Non-1st time home buyer – 5%
  • Two Units (owner occupied) – 15% Down Payment
  • Three Units & 4 units (owner occupied) – 25% Down Payment
  • Manufactured Primary Home – 5% Down Payment
  • Second Home (purchase) 1 unit – 10%
  • Investment (purchase) 1 unit – 15%

Homestyle Renovation Loan Minimum Credit Score

The Homestyle mortgage calls for a 620 minimum credit score, however, the interest rate/loan points increases below 680. If the lender is using an underwriting program, the credit score may impact the amount that the borrower can obtain.

HomeStyle Loan Contractor Requirements

The work must be carried out by a qualified contractor with appropriate licensing.

Borrowers must have a construction contract in place with their contractor in order to qualify for funding.

Fannie Mae provides a sample construction contract (Form 3734) that may be used to formalize the borrower's and contractor's agreement on construction.

A licensed, registered, or qualified general contractor, as well as an architect or renovation consultant, must create the plans and requirements.

The plans and specifications should include a comprehensive description of the work to be performed, as well as a timetable detailing when particular activities or stages of completion will occur (including both the start and job completion dates).

Draw schedule: Contractors may receive up to 5 draw payments and 50% of materials on the first draw. All work items costing more than $5,000 must be inspected.

Completion time – Up to 12 months

HUD consultant – Not required by the program, however, the lender may require a HUD consultant

Borrowers may make repairs on single-family owner-occupied houses, but the total cost of the repairs cannot exceed 10% of the as-completed value.

Borrowers may finance up to six mortgage installments if they are required to leave the home during the remodeling process.

HomeStyle Loan Limits

The maximum loan amount can be found at https://entp.hud.gov/idapp/html/hicostlook.cfm. Choose Fannie/Freddie with the Limit Choice.

Homestyle Renovation Loan Mortgage Insurance

Private mortgage insurance is required if the loan amount is greater than 80% of the property value after renovation. For example:

Purchase price – $200,000
Renovation cost – $50,000
Total – $250,000

Appraised value after renovation – $300,000

PMI calculation – $200,000 (purchase price) /$300,000 (after renovation) = 67%. No PMI required because the loan is less than 80% of the as completed value.

Private mortgage insurance is not required in the previous example. But what if the as completed value is $240,000.

Here's another example: $200,000/$240,000 = 83%. The borrower will have private mortgage insurance because the loan to value is 83%.

Maximum Homestyle Loan Amount

The maximum borrowing limit for purchase transactions is 75 percent of the lesser of the purchase price plus renovation expenses or the “as finished” appraised value; and for refinancing transactions, 75 percent of the “as completed” assessed value.

Loan to value (LTV) ratios are calculated for refinancing transactions by dividing the initial loan amount by the property's “as finished” appraised value.

Payment Reserves
Depending on the transaction type, credit score, loan to value, and number of units in the property, up to 12 months of reserves may be needed.

Homestyle Renovation Loan Do It Yourself Option

This option is offered to borrowers for single-family home upgrades that are undertaken by borrowers themselves. The do-it-yourself option is not permitted with prefabricated homes.

Renovations carried out “do it yourself” are limited to 10% of the property's “as completed” value.

The lender is responsible for pre-approving and evaluating improvements, as well as overseeing the completion of any items above $5,000.

A borrower may seek repayment for payments paid for supplies or properly documented contract work, but not for sweat equity payments (labor).

Labor and material costs associated with the renovation must be adequately budgeted by the lender so that, if the borrower is unable to complete the project, a contractor can be engaged to complete any “Do It Yourself” repairs. 

Homestyle Refinance Loan

When a HomeStyle Renovation loan is used in conjunction with a limited cash-out refinance, the loan may include amounts for the following:

  • the amount necessary to repay the current first mortgage;
  • expenses associated with closing, pre-paid fees, and discount points; and
  • Remodeling costs include all approved renovation-related expenses for home upgrades up to the maximum permitted loan to value and combined loan to value ratios, as well as the overall cost of remodeling.
  • The amount required to pay off any existing subordinate mortgage debts on the property purchased;

The borrower is not allowed to obtain any extra funds as a result of the refinance, including those costs that would usually be available under a limited refinance loan.

This option is provided to borrowers for single-family home improvements that are carried out by borrowers themselves. The do-it-yourself option is not permitted with prefabricated homes.

Do it yourself renovations are limited to 10% of the property's “as completed” value.

The lender is responsible for evaluating and pre-approving improvements, as well as overseeing the completion of any items above $5,000.

A borrower may seek reimbursement for costs paid for supplies or properly documented contract work, but not for sweat equity payments (labor).

Material costs and labor expense associated with the renovation must be adequately budgeted by the lender so that, if the borrower is unable to complete the project, a contractor can be engaged to complete any “Do It Yourself” repairs. 

SOURCE: Fannie Mae 203K and Homestyle comparison chart

Conclusion

In conclusion, a homestyle loan may be the better way to finance your renovation. By consolidating your debt and getting a lower interest rate, you can save money in the long run. A homestyle loan also allows you to spread out your payments over time, making it more manageable for you. So if you're thinking about renovating your home, be sure to consider a homestyle loan as a financing option.