Qualifying for conventional financing is a little tougher than government-backed financing. However, if you qualify for conventional financing, the guidelines are basically the same whether it is a standard Fannie Mae loan or a Fannie Mae HomeStyle Renovation Loan. Just like most loan products, the HomeStyle Renovation Loan requirements are specific to the product. In general, you can expect the following:
Down Payment Requirements
Just like most other Fannie Mae conventional loans, you must put at least 5% down on the home. However, the 5 % works differently than a standard purchase. Let’s look at an example:
John purchases a home that is ready to move in with a standard Fannie Mae loan. The price of the home is $200,000. John must put down at least $10,000 on this loan, which is 5% of $200,000.
Tracey purchases a home that is not ready to move into and uses the Fannie Mae HomeStyle Renovation Loan. After the inspector completes the inspection and the contractor works on the Scope of Work document with Tracey, they decide the home needs $50,000 in renovations. The purchase price of the home is $200,000, but the total price of the loan equals $50,000 after the work. This means Tracey must put at least $12,500 down on the home, which equals 5% of $250,000.
The HomeStyle Renovation Loan figures the down payment on the “as-completed” value of the home. Keep in mind, if you put anything less than 20% down on the home, you will pay Private Mortgage Insurance (PMI) until you reach less than an 80% loan-to-value (LTV) ratio on the home. This will figure into your debt ratio and possibly could affect your ability to qualify for the loan. The amount of PMI you pay varies based on credit score and the loan-to-value ration. The lower your score or the higher the LTV, the more PMI you will have to pay.
Fannie Mae requires credit “good” credit scores. Because this is a subjective opinion, you should aim for a score in the high 600s to be safe. Usually a score over 680 suffices as long as your other qualifying factors fit within the requirements. The higher your score, the more likely your chances of approval become. Scores over 700 often do not need compensating factors or other factors that make a loan less risky. For example, a person with a 720 credit score may have a slightly elevated debt ratio but still qualify for the loan. A borrower with a 620 credit score, on the other hand, would not receive the same concessions and would need a low debt ratio in order to qualify. Your credit score also determines the loan level price adjustments that will get added into your interest rates. Lower score = higher rate.
Debt Ratio (DTI)
Usually a debt ratio may not exceed 50% for this loan program. This includes your monthly mortgage payment and any other monthly debts you pay. Think of minimum credit card payments, student loans, car loans, and any personal loans you have each month. Your monthly mortgage payment includes more than the principal and interest. It also includes your annual real estate taxes and homeowner’s insurance. The lender adds 1/12th of each charge to your mortgage payment. If you must pay Private Mortgage Insurance, this amount figures into your debt ratio as well. Lastly, if there are any homeowner’s association fees, those figure into the ratio too. After totaling your monthly obligations and the new mortgage payment, you divide that amount by your gross monthly income (before tax). This amount cannot exceed 50% in most cases, for this program.
If you have money in your savings account outside of the money needed for a down payment, your lender may consider it “reserves.” The lender figures the amount of reserves you have based on how many months of your mortgage payment the savings cover. For example, if your total mortgage payment, including principal, interest, taxes, insurance, PMI, and association fees equals $1,700 and you have $5,100 in savings, you have 3 months’ of reserves. The lender uses this as a compensating factor and in consideration when determining your eligibility for the loan.
Typically, you do not need reserves to qualify for the HomeStyle Renovation Loan, but certain home types or ownership types may require a specific amount of reserves. The riskier your ownership or home type, the more money the lender requires you to have on hand. Generally, investment properties and second homes have higher reserve requirements. Consult with your loan originator to understand the specific HomeStyle Renovation Loan requirements. Reserves are a way to help the customer protect themselves against unforeseen evens that may require additional funding.
Type of Borrower
The Fannie Mae HomeStyle loan is available to any type of borrower. It is not reserved strictly for first-time home buyers. You can be a subsequent home buyer and still qualify for the loan. Some lenders may restrict the type of ownership they allow for the loan, however, we typically follow Fannie Mae guidelines, so we do allow for all types of borrowers.