Homestyle Loan: A Better Way to Finance Your Renovation
Roll in the rehabilitation money into a purchase or refinance mortgage!
I
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.