Freddie Mac ChoiceRenovation Loan vs RenoFi Loan: Which Is Better For Renovating?
Discover the differences between Freddie Mac ChoiceRenovation Loans and RenoFi Loans and how they both work for financing renovations.
Before RenoFi Loans came along, the two most common loan program options for buyers looking to refinance (or purchase) and renovate a home all in one loan were Fannie Mae Homestyle Renovation Loan and the FHA 203k loan.
In June 2019, Freddie Mac came out with a new renovation loan product for homeowners looking to refinance (or purchase) and renovate a home all in one loan: the Freddie Mac ChoiceRenovation Loan.
Freddie Mac ChoiceRenovation Loans give homeowners added borrowing power, because they’re based on the “after renovation value” of your property.
You’ve grown to love where you live, but you’ve outgrown your home. You could move, but it may mean choosing between the right home and the right neighborhood. So you’re considering a major renovation project, but don’t really know what your financing options are.
Chances are you’ve heard of Freddie Mac ChoiceRenovation Loans, but aren’t sure how these loans work when carrying out updates to your current house.
In this guide, you’ll learn about what Freddie Mac ChoiceRenovation Loans are, as well as learning about RenoFi Loans, an alternative that could be better suited to your needs.
We’ll look at:
A Freddie Mac ChoiceRenovation Loan might not be the best way for you to finance your home purchase and renovation.
Speak to a RenoFi Advisor today to talk through your options.
What Are Freddie Mac ChoiceRenovation Loans?
Freddie Mac ChoiceRenovation loans allow you the opportunity to finance the purchase or refinance and renovation of a home in a single loan.
This mortgage product lets you borrow against your home’s future value, increasing your borrowing power when compared to a traditional home equity loan or line of credit.
Whether you’ve fallen in love with a fixer-upper and want to purchase the house and turn it into your dream home, or have a lengthy wishlist of renovations to turn your existing property into the perfect space for you and your family, these loans can help you to do that now.
Just think about it this way…
You either buy a new house that you’ve found using a traditional mortgage, carry on living in your existing home knowing it needs work, carry out renovations a bit at a time over many years, or you find a financing option that lets you do everything right away.
And the extra borrowing power that comes with borrowing against your home’s future value makes it easier to get the full amount you need now, rather than having to make compromises on which projects you undertake and which have to wait until another time.
Key Points of Freddie Mac ChoiceRenovation Loan
- You borrow based on your “after renovation value” (ARV) - This biggest differentiator of Freddie Mac ChoiceRenovation loans versus traditional secured loans is that they’re based on the ARV, or after renovation value, of your home; not the home’s current value.
This allows homeowners like you to significantly increase how much you can borrow to remodel.
- It replaces & pays off your existing mortgage - If being used to renovate an existing home, you will be required to refinance your existing mortgage when taking out a Freddie Mac ChoiceRenovation loan.
And in order to do so, you have to pay it off. Both of these renovation loans include the additional funds to cover the balance of your first mortgage, plus the cost to cover the renovations and any closing costs.
- Rates are typically higher than some options - Keep in mind that Freddie Mac ChoiceRenovation interest rates range from .5% to 1% higher than traditional mortgage rates, meaning slightly higher monthly payments.
- You can renovate or repair properties damaged by natural disasters - One of the unique benefits of Freddie Mac ChoiceRenovation loans, as compared to similar products like FHA 203k loans and Fannie Mae Homestyle loans, is that you can use them to repair or protect against damage from natural disasters.
- You can earn a down payment credit - Another unique benefit of Freddie Mac ChoiceRenovation loans is that qualified borrowers can make all the renovations and repairs themselves to earn a down payment credit before closing.
How Much Can I Borrow?
For primary residences, Freddie Mac ChoiceRenovation loans let you borrow up to 95% of the ARV of the home.
So, if your home will have an after renovation value of $500k, you can borrow up to $475k.
But if you’re choosing to refinance and owe $375k on your first mortgage, you would only be left with $100k to pay for renovations and closing costs.
How Do Freddie Mac ChoiceRenovation Loans Work?
If you’re looking to increase your borrowing power, this loan’s after renovation value (ARV) financing structure can help you get a lot more money to put toward your renovations.
Here’s how the process works if you’re renovating a home you’ve already purchased…
- Make a list of the specific renovations you want to do.
- Hire a contractor/architect and finalize your renovation plans and submit these to your chosen lender. With these types of loans, you’ll need to make sure that you know exactly what you want to do, and the budget, before you submit the plans.
- The lender will then generally hire some sort of consultant (HUD consultant or other third-party) to inspect the renovation plans and the contractor, and you’ll be charged a fee for this service. Some lenders may not use anyone and will conduct their own analysis.
- The lender will then perform an appraisal based upon the after renovated value of the property.
- After the loan closes, the lender will place the renovation funds in an escrow account. The funds can only be released after progress inspections from an inspector. Up to 50% of the cost of materials can be advanced to your contractors right away.
- The lender manages draws based upon these inspections (intervals at which contractors can request funds). Every lender will have different rules surrounding the number of draws and inspections. 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. 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.
What Do I Need To Apply For These Loans?
For Freddie Mac ChoiceRenovation loans, prior to closing on the loan, you’ll need to provide:
- Cost Estimate - a formalized estimate written by your contractor.
- Income & Asset Verifications - bank statements, paystubs, W2s, & tax returns.
- Title Insurance & Title Report
- Homeowners Insurance - this may require both builders risk and standard insurance depending on loan amount.
To learn more about cost estimates, income & asset verifications or homeowners insurance, take a look at RenoFi’s Application Checklist Guide. Many of the documents required to apply for a RenoFi Loan are the same for Freddie Mac ChoiceRenovation loans.
How Do Freddie Mac ChoiceRenovation Loans Compare to RenoFi Loans When Renovating?
Here’s a side-by-side comparison on what you need to know to compare these loans and decide which loan is better for you:
|Freddie Mac Renovation Loan||RenoFi Loan|
|Eligible property types|
|Credit score required||660+||640+|
|Max debt-to-income ratio||43%, or meet Automated Underwriting System (AUS) approval.||45%|
|Mortgage limits||$548,250. ($822,375 in high-cost areas.)||$500,000|
|Time limits||Renovations must be completed within one year||Renovations must be completed in 2+ years (depends on lender)|
|Restrictions on improvements||No||No|
|Mortgage position||First position||Second position home equity loan|
As you can see both types of renovation loans have similar requirements and allow you to complete a wide range of projects.
The main difference between these two loans is their position: ChoiceRenovation loans are a first mortgage product, and RenoFi Loans are a second mortgage product.
Freddie Mac ChoiceRenovation Loan Vs. RenoFi Loan: Which Is Right For You?
If you’re looking to combine a Freddie Mac primary mortgage with a renovation loan, a ChoiceRenovation loan is a great option.
However, if you’re just looking for a home equity loan and you’d rather:
a) purchase a new home to renovate with a normal primary mortgage and then add on a home equity loan to finance renovation costs
b) you already own your home and aren’t looking to refinance your first mortgage
a RenoFi Loan is probably the better option.
Both the Freddie Mac ChoiceRenovation and RenoFi Loan ARV financing structure can help you get more money to put toward your renovations.
What Are The Downsides of Freddie Mac ChoiceRenovation Loans?
There are also some negatives to Freddie Mac ChoiceRenovation Loans when you’re planning to renovate your home.
- Hard to find a lender/get information: Unfortunately, there are very few lenders that offer ChoiceRenovation loans. Those that do don’t often advertise this option online. This means it can be difficult to shop around and find the right lender. Each lender will have different terms, fees and processes associated with their lending called “overlays” that can be confusing to navigate. If you’re looking for this type of loan, get ready to do some heavy research.
- Forced to refinance: If you’re looking to renovate your current home, you’ll be forced to refinance your first mortgage for this type of loan. That may not be a smart choice in the current rate environment, especially if you’ve already locked in a great low rate and don’t want to pay closing costs on a refinance.
- Pressure during home buying: In a competitive real estate market, the last thing you want to do is delay closing on your home. If you’re planning on using a Freddie Mac ChoiceRenovation loan to purchase a home, your offer will be less attractive to sellers and will require a longer closing time frame. This is a major negative in the market.
You need to make sure you’ve explored all of your options before choosing the best way to finance your renovation.
Homeowners aren’t always aware of all of the renovation loan options that are available, and that’s where we can help.
So what are the benefits of RenoFi Loans?
Introducing RenoFi Loans - An Alternative To Freddie Mac ChoiceRenovation Loans
If you’re considering either a Freddie Mac ChoiceRenovation loan, either to purchase a fixer-upper and pay for repairs or to refinance and renovate your existing home, a RenoFi Loan could be a better alternative.
A RenoFi Loan is a newer type of home renovation loan that can provide the ease of a home equity loan with the borrowing power similar to other renovation loans.
This means that RenoFi’s Renovation Home Equity Loan can offer the same benefits of Freddie Mac ChoiceRenovation Loans without the need to refinance.
Here’s how RenoFi Loans compare to other home renovation loan options, like HomeStyle and 203ks:
|RenoFi 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)||Freddie Mac Choice Renovation Loan||VA Renovation Loan|
|Is this a mortgage?||Yes||Yes||Yes||Yes||Yes||Yes||Yes|
|1st or 2nd mortgage?||2nd||1st||1st||1st||1st||1st||1st|
|Require refinance of existing mortgage?||No||Yes||Yes||Yes||Yes||Yes||Yes|
|Typical Interest Rate||Market||Above Market||Above Market||Above Market||Above Market||Above Market||Market|
|Loan Limit (Renovation Cost + Mortgage)||$500,000||Jumbos allowed||Conforming only||Conforming only||Jumbos allowed||Conforming only||Conforming only|
|Loan Term (max)||20 years||30 years||30 years||30 years||30 years||30 years||30 years|
|Credit Score Required||640+||700+||620+||580+||580+||660+||620+|
|Loan to Value||Up to 95%||Up to 95%||Up to 95%||Up to 96.5%||Up to 80%||Up to 95%||Up to 95% (90% if refinancing)|
|Can be used for building new home?||No||Yes||No||No||Yes||No||No|
|Restrictions on type of improvements?||No||No||No||Yes||No||No||Yes|
The main things you need to know about RenoFi Home Equity Loans are:
- You can borrow between $20k and $500k
- Terms of up to 20 years
- 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
A RenoFi Loan can help you to borrow the most money for your renovation with the lowest monthly payments. You also won’t have to deal with specified draws after you close on the loan, the money will go straight to you and you can pay your contractor directly.
Schedule a call (or chat online) with one one of our advisors today and they’ll be more than happy to look at your options with you and talk you through how this could be better for you than a Freddie Mac ChoiceRenovation loan.
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...