Purchasing a home is expensive, and adding the need for renovations on top of that can seem unlikely for many. Without having thousands of dollars set aside for renovations, it may seem like the only other option is a second mortgage. However, if you qualify for conventional financing, you have the option to use the Fannie Mae HomeStyle Loan. This loan provides funds to purchase and renovate a home all at once. You can also use it to refinance a home you already own.
The HomeStyle loan is a single loan with one closing, but multiple steps. It offers flexible and affordable financing to help you make your house a home. With this single close loan, you purchase and secure the funds to renovate your home all in one loan. This is a Fannie Mae product, but not all lenders offer it. There are special approvals that lenders must go through in order to be able to offer the HomeStyle renovation loan, and even the lenders who offer it may not have the expertise to make it a smooth process. At AnnieMac, we have a dedicated Renovation Department to help guide you through the HomeStyle loan process.
Understanding How the HomeStyle Loan Works
The HomeStyle loan is a renovation loan. It allows you to borrow funds based on the future value of your home. Whether you purchase a home or refinance an existing home, the loan works in much the same way. At the closing, the seller or first lienholder receives payment. The seller receives the agreed upon sales price minus any fees they owe. In the case of a refinance, the closing agent pays off the current first lienholder in full. The money left over after paying off the existing liens is available for renovations.
You never see the funds that are left after paying the seller or your first lienholder, though. The lender holds the funds in an interest-bearing escrow account. The lender must apply all money borrowed to the home’s renovations. Prior to the closing, the lender works out a disbursement schedule with the approved contractors. The lender determines the timing and amount of money disbursed by the consultant, contractor and/or architect. These plans include the scope of work they will complete as well as the deadline for each phase. Together, with the lender, an appropriate funding schedule is determined. If there are funds leftover, the lender does not disperse these funds until the work is complete.
When refinancing using the HomeStyle Renovation Loan, it is considered a limited cash-out refinance. This means you cannot receive cash in hand at any point during the process. The loan can cover the existing lien/purchase price, cost of renovations, fees to obtain the loan, and miscellaneous fees coinciding with the HomeStyle Loan process.
Eligible Properties for the HomeStyle Loan
Just like Fannie Mae’s other products, you can use the HomeStyle loan on different properties as well as for different types of ownership. The most common use is for owner occupied properties. This means a property you purchase for you and your family to live in full-time. However, some people use the loan product for other purposes including investments and second homes. Investors commonly use the loan to help them fix run-down homes and then eventually sell them for a profit or offer them for rent. The type of ownership of the home determines the eligible properties for the program.
If you plan to live in the home, you have a bit more flexibility on the eligible properties including:
- Single-family homes
- Multiple unit properties up to four units
If you will not live in the property and rather use it as a second home or investment property, you can only use the loan product on a single unit. This includes single-family homes, condominiums, and PUDs. Investment or second homes cannot be a multiple unit property under any circumstances for this loan program. In addition, whether you have an owner occupied, investment, or second home, you cannot use the loan product for manufactured housing.
Maximum Allowed Renovation Costs
Fannie Mae does not limit the type of renovations you may do, with the exceptions stated above. However, they do limit the amount you may borrow for renovations. As a general rule, you may borrow up to 50% of the completed value of the property for renovation costs. For example, if appraiser comes up with a completed value for the property of $400,000, you can borrow up to $200,000 for renovation costs. Of course, the amount you borrow for renovations depends on the amount you use for the purchase cost or to pay off your existing first lien.
The cost of renovations account for several things:
- Labor for the work done
- Materials necessary to do the work
- Fees for the architect
- Fees to obtain permits
- Fees to obtain licenses
- Money for your contingency reserve
- Reserves when necessary to cover your mortgage payment
AnnieMac – Your HomeStyle Renovation Loan Specialists
You can likely find Fannie Mae loans at a majority of lenders in your area; however, not every Fannie Mae lender offers the HomeStyle loan. At AnnieMac, we have a dedicated Renovation Department that specializes in the HomeStyle Renovation Loan. We will make sure you are comfortable throughout the entire loan process, while helping you create the home of your dreams. Call AnnieMac today to secure your HomeStyle Renovation Loan.