Fannie Mae Homestyle Renovation Loans: What They Are & How They Work
A comprehensive guide to help you figure out whether a Fannie Mae HomeStyle renovation loan is the best way to finance your renovation and a look at the alternative options.
Whether you’ve fallen in love with a fixer-upper or have a list of renovations that you want to do to turn your current home into your forever home, there’s a good chance you’re going to need to borrow money to make this a reality.
And one option that you might be considering is a Fannie Mae HomeStyle loan.
Similar to FHA 203k loans, these let you combine the cost of purchasing (or refinancing) a property and the renovation costs into a single loan and let you borrow based upon the home’s future value, significantly increasing your borrowing power as a result.
But these loans aren’t simple and straightforward.
In fact, they’re quite the opposite; and everything from the qualifying criteria to the lengthy and complex process that must be followed makes it important for you to understand exactly how they work, before making a decision on whether they’re the right choice for you.
And in this guide, you’ll learn everything you need to know about HomeStyle loans and how they stack up against the alternatives.
Specifically, we’re going to take a look at:
A Fannie Mae HomeStyle loan might not be the best way for you to finance your renovation.
Speak to a RenoFi Advisor today to talk through your options.
If you’re considering using a HomeStyle loan to finance the purchase and renovation of a fixer-upper or are considering using one to pay for a remodel on your current home, be sure to take the time to consider all of the available options so that you’re making the right decision.
After all, making a mistake can be expensive or add unnecessary complexity to your project.
What is a Fannie Mae HomeStyle Loan?
A Fannie Mae HomeStyle loan is a government-sponsored product that lets you finance the purchase (or refinance) and renovation of a property into a single loan.
As opposed to taking out a traditional mortgage and using another loan to pay for renovations, it’s a type of home renovation loan that combines the funds you need to buy and renovate into one loan. This means that borrowers will face just one set of closing costs and have just one monthly payment to make.
These loans can also be used to refinance and pay for a remodel on an existing property. They come as either 15 or 30 year fixed-rate mortgages or adjustable-rate mortgages that have a minimum down payment requirement of 5% of the combined cost of the property plus repairs (although a 97% LTV may be available to first time homebuyers).
How Much Can You Borrow With a Fannie Mae HomeStyle Loan?
With a HomeStyle loan, you can borrow up to 95% of a property’s after renovation value up to Fannie Mae’s maximum loan limit of $548,250 (or $822,375 in high-cost markets).
And to give an example, if your home will be worth $500,000 after renovation work has been completed, you could borrow $475,000 (to cover the combined cost of the property, the renovation and renovation closing costs).
It’s this ability to borrow based on your home’s after renovation value that increases your borrowing power and can make it easier for you to get the funds you need to carry out repairs and renovation work without having to have built up tappable equity.
How Does A Fannie Mae HomeStyle Loan Work?
Whether being used to buy and repair a fixer-upper or to refinance your current home to pay for renovations, here’s how this type of loan works:
- Find a fixer-upper for sale that needs renovation repairs or decide to renovate your home by borrowing against its after renovation value
- Find a Fannie Mae-approved lender and apply for the loan.
- Work with an approved contractor and/or architect to draw up and finalize your plans and prepare a detailed bid for the renovations. A copy of these must then be supplied to the lender.
(Your lender will send all estimates to a HUD consultant, they perform a specification of repairs, which is an evaluation of the estimate to make sure that you’re being charged the right amount of money for the renovation by the contractor.)
- The lender will then perform an appraisal based upon the after renovated value of the property.
- Close on the loan.
- After the loan closes, the lender will place the renovation funds in an escrow account. If your renovation amounts are greater than $35,000, or structural in nature, a HUD consultant must be hired to authorize the release of the funds. The funds can only be released after a progress inspection from the HUD consultant.
- Your renovation must begin within 30 days of the loan closing and must be completed within a six month period. Your contractor will be paid according to the draw schedule and following inspections.
- The lender manages draws based upon these inspections (intervals at which contractors can request funds). These inspections are carried out to determine where a project is in relation to the proposed timeline, and that the construction work matches the initial plan and is completed in a workmanlike manner. Then when renovation work is completed, the lender will conduct a final inspection to check that the project has been undertaken to the original specification and release the final funds to your contractor.
It’s important to remember that steps one through five must be completed before you can close on the property if you’re using the loan to purchase your home.
The reality is that the process is complex and confusing, and delays during this are common.
How To Qualify For a HomeStyle Loan
In order to quality for a HomeStyle loan, borrowers must meet the following lending criteria as set out by Fannie Mae:
|Eligible property types||- Single family homes - 1 unit second homes - 1 unit investment properties - Two, Three, or Four-unit properties - Condos & co ops - Manufactured homes (although eligible renovation funds are capped at the lesser of $50,000 or 50% of the “as-completed” appraised value on this type of property)|
|Eligible applicants||Individual homebuyers, homeowners and investors.|
|Approved contractors?||Renovation work must be undertaken by an approved contractor and architect, but borrowers with single-unit, owner-occupied properties may be allowed to undertake some of the work themselves as a DIY project, so long as this makes up no more than 10% of the after renovation value.|
For the most part, HomeStyle loans aren’t intended to be used to finance DIY renovations.
|Credit score required||620+|
|Max debt-to-income ratio||45%, or meet Automated Underwriting System (AUS) approval.|
|Mortgage insurance premium||No upfront MIP. As low as 0.4% monthly. This can be removed after 12 years or with proof of at least 20% equity.|
|Mortgage limits||$548,250. ($822,375 in high-cost areas.)|
|Limit on eligible renovation funds||75% of the lesser of the purchase price plus renovation costs, or the “as-completed” appraised value for purchase transactions; and 75% of the “as-completed” appraised value for refinance transactions.|
|Time limits||Renovations must be completed within six months of closing the loan|
What Renovations Can A HomeStyle Loan Be Used For?
HomeStyle loans have fewer restrictions than FHA 203ks, and allow for both cosmetic and structural repairs and improvements to be made. And this means that luxury items are permitted.
That said, the borrower and property must meet the eligibility criteria outlined above.
Just some of the renovation projects that could be financed with a HomeStyle include:
- Full house remodel
- Kitchen remodel
- Bathroom remodel
- Swimming pool addition
- Tennis court addition
- Barbecue area addition
- Financing an ADU (See additional qualifications)
- Basement finishing
It’s important to note that these loans cannot be used to tear down and reconstruct a home, nor can structural additions add another unit to the property (e.g. they cannot be used to turn a single unit property into a two unit one).
The Pros and Cons of a HomeStyle Loan
There are pros and cons of Fannie Mae HomeStyle loans that you’ll need to consider before deciding whether this type of financing is the best way to pay for a renovation:
|A single loan that covers the purchase and renovation of a property.||Mortgage insurance is required (As low as 0.4% monthly and this can be removed after 12 years or with proof of at least 20% equity.)|
|Can be used to refinance and renovate.||Additional steps compared to alternatives that can cause delays in the process. These loans typically take longer to close than traditional mortgages.|
|Borrow based on the after renovation value of the home.||Your renovation must be overseen by an HUD consultant if the loan amount is over $35,000 or structural in nature, adding more work and extra complexity when compared with alternative ways of financing.|
|Low down payment requirements (or required equity position) of 5%.0||If you’re using an HomeStyle loan to purchase and renovate a home, you’ll have little time to think about big decisions as you must submit your full rehab proposal up front and begin work within 30 days of the loan closing. This means that you need to know exactly what you want upfront.|
|Can be used on a second home, vacation home or investment property as well as single family homes, meaning they’re available to investors as well as homebuyers. In comparison, an FHA 203k can only be used for a primary residence.||The interest rate is normally higher than most alternatives (including home equity loans and lines of credit, cash-out refinance or RenoFi Loans).|
|Can be used to finance most renovation projects, including luxury amenities such as the addition of a swimming pool, a tennis court, a barbeque area or similar.||Higher fees and closing costs than other types of financing|
|No upfront Mortgage Insurance Premium (MIP) is required, unlike with an FHA 203k loan.||You still need mortgage insurance, which can be costly.|
|Homebuyers can consider fixer-uppers they could otherwise not afford to renovate.||Many contractors simply refuse to take on projects that are using loans like this due to the headaches involved with the inspections. and disbursement schedule.|
|Single close means you only sign one set of documents and pay one set of closing costs.||If used to pay for renovations on your current home, you will need to refinance your parent mortgage, often at a higher rate. This also slows down the rate at which you build equity.|
|A lower credit score requirement than private bank alternatives (yet higher than for an FHA 203k).||Still has a minimum credit score requirement of 620.|
|You’re on a timeline and only have six months to complete renovation work.|
While you can clearly see that HomeStyle loans offer a number of benefits to homebuyers looking to take out a single loan to purchase a property and renovate it, or for homeowners to refinance their existing mortgage to cover the cost of a remodel, it’s also difficult not to ignore the drawbacks that come with this financing option.
And while a HomeStyle loan is the best option for some people, many will find that an alternative gives them an increased level of flexibility, less hassle or lower monthly payments.
Keep reading and we’ll look at these alternatives.
Fannie Mae Homestyle Loans vs FHA 203k Loans
It’s common for Fannie Mae HomeStyle loans to be considered as an alternative to FHA 203k loans, and in many ways, these two types of construction loans are very similar.
Both of these loans let you combine the costs of purchasing (or refinancing) and renovating a property and borrow based on the after renovation value, but there are a few differences that you need to consider.
In comparison to HomeStyle loans, FHA 203k loans offer:
- A lower minimum down payment requirement of 3.5%.
- A lower minimum credit score requirement of 580+.
- Cannot be used for vacation homes or investment properties.
- Require an upfront Mortgage Insurance Premium of 1.75% of the loan amount and .8% monthly.
- In some cases, interest rates are higher than on HomeStyle loans.
Maximum loan amounts are typically lower (location dependent based upon FHA mortgage limits).
When comparing Fannie Mae HomeStyle loans and FHA 203k loans, a main influencing factor is going to be your credit score.
To get a HomeStyle loan, you’ll need a minimum score of 620, whereas for an FHA 203k, you’ll qualify with a lower score of 580.
If you have the credit score to qualify for a Fannie Mae HomeStyle, the benefits are incomparable in the long run and this will be the better option.
But, that doesn’t mean there aren’t alternatives to these two types of loan. However, the reality is that many people aren’t aware that they exist.
And this is why it’s so important to explore your options before making a decision to make sure you’re going down the most suitable route.
Introducing RenoFi Loans - An Alternative To A HomeStyle Loan
And if you’ve been considering a HomeStyle loan as a way to borrow the money needed to tackle your renovation wishlist, it’s an option that we think you’ll want to know a bit more about.
You see, a RenoFi Loan allows you to borrow based on your home’s after renovation value but does not require you to refinance your existing mortgage like the other types of home renovation loans do. It’s the only loan of this type that won’t require you to refinance, in fact.
And just like with HomeStyle loans, a RenoFi Loans can be used both by existing homeowners looking to finance their renovation project or homeowners who are looking to purchase a new home and renovate it.
Existing homeowners can stay locked into their existing mortgage rate and borrow based on their home’s future value, whereas homebuyers looking to purchase can buy using a traditional mortgage before using a RenoFi Loan to finance their renovation after closing. This, of course, makes the process significantly easier and helps to avoid the added complexities of the HomeStyle loan process.
And to see just how these loans compare to the other renovation loan options, including HomeStyles, take a look at the below:
|Renovation Home Equity Loan||Single-Close Construction To Permanent Loan (CTP)||Fannie Mae HomeStyle Loan||FHA 203k (Full)||Two-Close Construction To Permanent Loan (CTP)|
|Is this a mortgage?||Yes||Yes||Yes||Yes||Yes|
|1st or 2nd mortgage?||2nd||1st||1st||1st||1st|
|Require refinance of existing mortgage?||No||Yes||Yes||Yes||Yes|
|Typical Interest Rate||Market||Above Market||Above Market||Above Market||Above Market|
|Loan Limit (Renovation Cost + Mortgage)||$500,000||Jumbos allowed||Conforming only||$Conforming only||Jumbos allowed|
|Loan Term (max)||20 years||30 years||30 years||30 years||30 years|
|Credit Score Required||660+||700+||620+||580+||580+|
|Loan to Value||Up to 95%||Up to 95%||Up to 95%||Up to 96.5%||Up to 80%|
|Can be used for building new home?||No||Yes||No||No||Yes|
|Restrictions on type of improvements?||No||No||No||Yes||No|
The main things you need to know about RenoFi Home Equity Loans are:
- You can borrow between $25k and $500k
- Terms of up to 20 years
- Same low fixed rates as traditional home equity loans
- Ability to borrow up to 95% of your home’s after renovation value
- The full loan amount is available at closing
- You won’t need to refinance your existing mortgage
Quite simply, a RenoFi Loan can help you to borrow the most money for your renovation with the lowest monthly payments and, perhaps just as importantly, without the hassle that’s associated with construction loans (which in itself is one of the reasons why contractors hate them).
If you’re interested in learning more about whether a RenoFi Loan might be the right way for you to finance your renovation, schedule a call or chat with one of our team to discuss your options and help you to get the home you want on your terms.
How do I know if a RenoFi loan is right for my project?
The RenoFi team is standing by to help you better understand how RenoFi Loans work and the projects they are best suited for. Have a question - Chat, Email, Call now...
5 Reasons Why You Shouldn’t Use A HomeStyle Loan (& Consider A RenoFi Loan Instead)
So why should you consider a RenoFi Loan rather than a Fannie Mae HomeStyle renovation loan to finance your renovation? Here are 5 reasons:
A complex process that commonly causes delays
With any type of construction loan, there’s a whole load of extra steps that are required both of you and your contractor throughout the process.
And these complexities can cause delays and slow down the project.
If you’re using a HomeStyle loan to purchase a property, you could find yourself at a disadvantage in a competitive market as a result of these extra steps. After all, if another buyer is using a traditional mortgage, rather than the renovation mortgage that you’re using, the chances are that they’ll be able to secure their loan quicker than you can.
The alternative option, of course, is to use a traditional mortgage yourself and use a RenoFi Loan to finance your renovation after closing.
Big decisions must be made under time constraints
If you’re using this type of loan to purchase and renovate, you’ll find yourself needing to make big decisions under tight time constraints and deadlines. And this isn’t ideal for anyone.
You’re forced to rush the process of everything from planning the renovation to finding the right contractor, leaving you little time to carefully think about what you truly want to get out of your project and those little extras that turn a house into a home.
On the other hand, buying with a traditional mortgage then renovating with a RenoFi Loan lets you take your time to do your renovation your way, without time constraints.
Higher fees and costs
HomeStyle loans typically come with higher fees and closing costs than other types of financing.
Let’s also not forget that, when combined with higher rates, many homeowners choose to refinance after the renovation is completed, meaning a second set of closing costs will have to be paid.
You’re forced to refinance if using to pay for renovations on your current home
If you’re using a HomeStyle to renovate your current home, you’ll need to refinance your existing mortgage.
And this means you might end up having to refinance onto a higher rate, further increasing your monthly payments.
In comparison, a RenoFi Loan doesn’t require you to refinance, while still allowing you to benefit from your home’s after renovation value.
You won’t get your money right away because of a complicated draw process.
Unlike with a RenoFi Loan or other types of financing, these loans don’t give you the funds right away. Rather, they involve a complicated draw process and give it to your contractor in installments.
But this is far from being a simple process. In fact, it’s pretty much the exact opposite.
Your contractor will be required to create a draw schedule and your lender will request inspections at set stages throughout the project. And these cause headaches and delays for both of you.
Just take a look at this draw schedule from our guide to 3 reasons why you shouldn’t use a construction loan for your renovation to see how complicated this can be:
Fannie Mae Homestyle Loans vs Other Ways of Financing Home Improvements
Aside from FHA 203k loans and RenoFi Loans, other common alternatives to HomeStyle’s for financing home improvements include:
- Home equity loan
- Home equity line of credit
- Cash-out refinance
- Personal loan (often marketed as home improvement loan) & credit cards
And while equity is a common way to pay for home renovations, there’s just one problem with this. One that RenoFi CEO & Co-Founder Justin Goldman touches upon:
“The two most popular existing financial products used to finance home renovations - cash-out refinance or a home equity loan - are not designed for renovations. While they can work well for long-term homeowners (those who’ve been in their homes 10+ years), they don’t serve recent homebuyers who haven’t yet built up equity.”
As an example, take a look at just how long it takes a new homebuyer to build up $100k in tappable equity (based on a $400k house with a 15% down payment):
The reality is that it could take recent homebuyers 10 years or more to be able to afford to carry out their full renovation wishlist by using equity.
And we don’t think you should have to wait that long, especially when the reality is that most renovation projects will increase the value of your home.
For this reason, many turn to high-interest personal loans or credit cards, however in our opinion, this is one of the dumbest things that homeowners do when paying for a renovation, alongside draining emergency savings, borrowing from their 410k or refinancing onto a higher rate.
Take the time to understand your options and choose the financing option that is right for you and that gives you the maximum borrowing power at the lowest possible cost.
Can You Use A HomeStyle Loan To Refinance & Renovate Your Current Home?
While Fannie Mae HomeStyle loans are commonly used as a way for homebuyers to finance the purchase and renovation of a fixer-upper in a single loan, they can also be used by current homeowners to finance their renovation wishlist.
You will need to refinance your existing mortgage, and this could mean you need to do so onto a higher rate.
The same criteria and eligibility requirements for these loans apply when using them to refinance and renovate your home as when they’re used to buy and renovate.
The Importance Of Choosing The Right Renovating Financing Option
Don’t rush into making a decision around the best way to finance your renovation as this can end up being an expensive mistake.
But we get it, not everyone who is considering a HomeStyle loan knows that other options exist (except, perhaps the FHA 203ks).
The reality is, though, that most people who are looking to finance their renovation don’t need to be using traditional options that add a whole load of complexities to the process. Especially not when a RenoFi Loan could offer the same benefits without the need to refinance, along with lower fees and interest rates.
Speak to one of our advisors and find a lender offering RenoFi Loans in your area today and thank us later for introducing you to an alternative to HomeStyle loans.
How do I know if a RenoFi loan is right for my project?
The RenoFi team is standing by to help you better understand how RenoFi Loans work and the projects they are best suited for. Have a question - Chat, Email, Call now...