Buy a home and fix it up with Fannie Mae’s HomeStyle loan
Renovating a home often means taking one loan for the purchase and another for the renovation. And sometimes you may need to refinance your mortgage to pay down the renovation loan. Talk about expensive and time-consuming!
A HomeStyle Renovation loan can solve that problem.
The Fannie Mae HomeStyle loan lets you buy or refinance a home, and renovate it using the same single mortgage — which can save you a whole pile of money and hassle.
Fannie Mae’s HomeStyle loan is lesser known than the similar FHA 203k program. And yet, for many borrowers, it’s the cheaper option.
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What is the Fannie Mae HomeStyle loan?
Freddie Mac reckons the average age of an American home is 37 years. In some parts of the country that rises to 51-61 years. So it’s not surprising that many people want to renovate the home that they buy.
But home renovations can be pricey. And taking out a separate loan for repairs after you buy the home adds to your closing costs and paperwork.
Enter the HomeStyle Renovation loan.
FannieMae’s HomeStyle program lets you buy a fixer-upper home and pay for renovation costs with a single mortgage loan.
You apply and close just once — meaning only one set of closing costs. And your mortgage and renovation will be financed at the same low rate.
For many, a HomeStyle loan is the best choice. But there are other products that do much the same, including Freddie Mac’s CHOICERenovation and the Federal Housing Administration’s FHA 203(k) loan. So explore your options to see which suits you best.
HomeStyle loan benefits
Here’s why so many choose Fannie Mae’s HomeStyle Renovation loan:
- Your down payment can be as low as 3% if you plan to live in the home and you’re a first-time buyer getting a fixed-rate loan. Down payments are higher for manufactured homes, multifamily units, and second/investment properties
- For repeat buyers, you may qualify for 3% down if combining HomeStyle with the HomeReady loan
- The appraiser will assess the home based on its future value after the renovation work is completed
- You can do some of the renovation work yourself, though not safety-critical tasks, which must be carried out by licensed professionals. All work will be inspected for quality and the value of your work is capped at 10% of the loan amount
- You can add mortgage payments to the loan balance until you move in if you can’t live in the home during the renovation. (Time limits apply)
Those are available to typical borrowers. But there may be special conditions if you, the home, or your project are atypical.
In addition, you can bundle a Fannie Mae HomeStyle loan with other products in Fannie’s portfolio, including:
- HomeStyle energy — To make your home more energy-efficient or more resilient to natural disasters at the same time your renovations are completed
- HomeReady — Fannie Mae’s most lenient mortgage program with special eligibility rules for lower-income and/or first-time home buyers
One last thing: Not all mortgage companies are approved HomeStyle Renovation lenders. So you may have to search for candidates when you comparison shop.
How the Fannie Mae HomeStyle Renovation loan works
Since HomeStyle lenders are shelling out extra money for home repairs, there are a few additional hoops to jump through when you get this type of loan. There are safeguards that add extra layers to the application and renovation process.
Here are the usual steps to apply and get approved for a HomeStyle Renovation loan.
- Find a lender and get pre-approved for a HomeStyle loan so you know you’re eligible
- Choose a reputable, licensed contractor and work with them to create detailed plans and schedules for the work to be done
- Submit those plans to the lender, which shares them with the home appraiser
- The appraiser inspects the home and reviews the plans to arrive at an “as-complete valuation” (what the home will be worth when everything’s done)
- Your lender tells you the maximum loan amount you can borrow
- Fannie Mae buys the mortgage (sometimes) and the lender places funds for the renovation in a ‘custodial account’
- The contractor starts work and submits requests for funds as certain milestones are met
- An inspection takes place for each draw (request for funds), and the lender releases the money if all is satisfactory
- When work is complete, the lender orders a final inspection and appraisal. If all is well, any remaining funds are released
- Finally, there’s a little flurry of backroom activity, including the updating of the property’s title
- You now own a newly-renovated home. Since the mortgage and renovations are a single loan, you only make one monthly payment to your mortgage lender
That may sound a lot. But it’s generally much cheaper and carries a smaller administrative headache than juggling multiple loans.
Requirements to get a HomeStyle loan
As with any mortgage, you and your home both have to meet basic eligibility requirements for a Fannie Mae HomeStyle loan.
Requirements can vary by lender, but as a minimum, you’ll need:
- A credit score of 620 or better
- A debt-to-income ratio (DTI) of 45% or lower
- A loan-to-value ratio (LTV) no higher than 97% (based on the lesser of as-complete value or purchase price plus renovation costs)
- A steady job
- A reliable income stream (with tax returns to prove it)
In short, qualifying for a HomeStyle loan is much the same as qualifying for any conforming mortgage.
Even if you have less than 3% down, you may qualify for help from the thousands of down payment assistance programs that are available across the country. These can offer grants or forgivable loans to help you cover your upfront home buying costs.
Fannie Mae’s own Community Seconds program can offer eligible borrowers a loan of up to 5% of the home’s value to help with down payments and closing costs.
Fannie Mae has an array of minimum property requirements that apply to the home you want to buy.
Most of these are common sense, including that the home must be:
- A residence that’s legally real estate
- Suitable for year-round occupation
- “Safe, sound, and structurally secure.”
- “Readily accessible by roads that meet local standards”
- “Served by utilities that meet community standards”
You can use the rehab portion of your HomeStyle loan to bring the home up to those standards. But you’ll need to show how in your plans.
In addition, the home does not need to be your primary residence.
Fannie Mae allows HomeStyle Renovation loans for second homes and investment properties, too, with anywhere from one unit to four units. (Although, borrower requirements might be stricter for these types of properties.)
Keep in mind, too, that the final loan amount including purchase price and renovation costs cannot exceed local conforming loan limits — which are currently capped at $548,250 in most areas (but you can look up your loan limit here).
HomeStyle Loan contractor requirements
Understand that you aren’t the only one who has to meet Fannie Mae’s requirements. You also need to choose a licensed contractor to complete the bulk of the work.
You can’t get an old, handy pal to do the rehab for you — unless he or she meets Fannie’s standards.
According to Fannie Mae, your mortgage lender must determine that your contractor is:
- “Qualified and experienced,
- Has all appropriate credentials required by the state,
- Is financially able to perform the duties necessary to complete the renovation work in a timely manner, and
- Agrees to indemnify the borrower for all property losses or damages caused by its employees or subcontractors”
Those shouldn’t be a problem for most reputable, licensed professionals. But it can help to choose one who’s been through the HomeStyle process before.
It can be a big help to choose a contractor who’s already familiar with the HomeStyle loan process.
Using a contractor who’s already familiar with the HomeStlye process means they’ll already know how to complete their plans, schedule, and cost estimate according to Fannie’s requirements. This can help the process go more smoothly and ensure that your renovations are completed without setbacks.
Allowable home improvements
Unlike some rehab loans, Fannie imposes few restrictions on how you can spend the renovation funds. However — with the exception of kitchen appliances — it does say that “improvements should be permanently affixed to the real property.”
So, for example, you can add a swimming pool and recreational structures in your yard, when allowed by local zoning regulations.
The improvements shown in your plans must convince the appraiser that they’ll add enough to the value of the home to justify the loan.
But there aren’t formal caps on what you can spend beyond a general rule that your rehab can’t cost more than 75% of the home’s as-complete appraised value.
HomeStyle Renovation construction costs max out at 75% of the as-complete value
For example, you plan to have an eventual value of $350,000 on a fixer-upper. The most you can spend on a renovation to get it there would be $262,500. This is quite a generous construction amount, considering most FHA 203k loans max out as around $30,000 in hard construction costs.
There is, however, one restriction. You cannot knock down the existing structure and then build a new one. If you want to build a brand-new house, you’ll need a new construction loan.
Fannie Mae HomeStyle vs. FHA 203k
The FHA 203k mortgage is another popular rehabilitation loan offered by the Federal Housing Administration.
Both these loans achieve the same thing: They let you buy a home and renovate or remodel it within a single mortgage. But there are some key differences.
- Allow credit scores of 580 or better. That’s less than Fannie’s 620 minimum score. But some mortgage lenders may require higher scores for both loans
- Require a 3.5% minimum down payment. Slightly more than Fannie’s 3% minimum
- Have a maximum debt-to-income ratio of 43%. That’s a bit more strict than Fannie’s 45%
- Place stricter limits on the types of renovations you can do. No ‘luxury’ home improvements are allowed, like pools, tennis courts, or landscaping
- Require continuing mortgage insurance premiums until you sell or refinance. Fannie lets you off the hook when your mortgage balance reaches 80% of your home’s market value
- Lower maximum construction costs of around $30,000 are allowed with FHA ‘limited’ 203k — the ‘easy’ version of this loan. If you need more, you’ll need the full 203k, which are more complex and offered by fewer lenders
- Don’t let you do any of the work yourself
If your credit score is in the “good” range, you’ll probably be better off choosing Fannie’s product. If you have time, you can work on improving your score before you apply.
But, if your credit score is on the lower end of the spectrum, you might find the FHA 203k loan to be your best choice.
Even borrowers with a score right around 620 (Fannie’s minimum) and a small down payment might find an FHA loan to be cheaper because it could have lower mortgage insurance costs.
Fannie Mae HomeStyle vs. Freddie Mac CHOICERenovation
It’s hard to spot a significant difference between Fannie Mae’s HomeStyle and Freddie Mac’s CHOICERenovation loan.
Originally, Freddie allowed extra work to add to a home’s resilience in the event of natural disasters. And it still does. But Fannie offers the same if you bundle your HomeStyle Renovation mortgage with a HomeStyle Energy one.
And Freddie differs in one more respect. It allows you to use your “sweat equity” (materials provided or labor completed by a borrower prior to closing) to reduce your down payment. But it’s up to the appraiser to assess and value your contribution.
Still, for most borrowers, there’s very little difference between Fannie’s and Freddie’s rehab products.
Either one could be a good option, and the better choice for you likely depends on what’s available from local lenders and which one offers the better interest rate.
Other home renovation loan options
The HomeStyle, 203k, and CHOICERenovation loans aren’t your only options for home improvements.
If you already own your house and you’re feeling like it’s time for an upgrade — maybe a kitchen remodel or a new pool — you might be able to finance the cost using home equity.
Depending on your current home equity and your home’s value, you could potentially use one of three options:
- A cash-out refinance — If today’s mortgage rates are below your existing rate, a cash-out refinance might be a good way to tap home equity because you could lower your interest rate at the same time
- A home equity loan — This is a fixed-rate ‘second mortgage’ that lets you tap your home equity without touching your existing mortgage. It could be a good option if your home is nearly paid off or your already have a low mortgage interest rate
- A home equity line of credit (HELOC) — This is typically a variable-rate, revolving line of credit that you can tap, repay, and use again as needed. Like a home equity loan, a HELOC is a ‘second mortgage’ secured by your home
There are pros and cons to each of these strategies — too many to go into here. But if you’re leaning toward home equity financing, you can see this article to learn more about your options.
Fannie Mae HomeStyle FAQ
Not all lenders offer HomeStyle mortgages. But plenty do. So shop around, as usual, to find your best deal.
You can spend up to 75% of the home’s as-complete appraised value on renovations. The mortgages themselves are capped only by the usual loan limits. In most of the US, that is $548,250 in 2021. But areas with high home prices have higher limits, over $820,000 in some real estate markets.
Interest rates are similar to other conforming loans. You shouldn’t normally pay more just because you have a rehab loan. And, as with all Fannie Mae loans, your credit score and down payment affect your mortgage rate. So working to improve these before you apply can earn you a bettter deal.
It’s Fannie’s standard 620. But individual lenders can set their own minimums so some may want higher scores. Shop around!
You can put down as little as 3% as long as you are buying a 1-unit home that you plan to live in and getting a fixed-rate loan. You also have to be a first-time buyer unless you combine the HomeStyle loan with the HomeReady option. Minimum down used to be 5%, and some sources may wrongly still suggest that.
No. Current homeowners can use the Fannie Mae HomeStyle loan, too. Many choose them when refinancing so that they can improve their existing home.
You bet! If your existing home needs a serious refresh, a Fannie Mae HomeStyle loan can help you transform it.
Yes, at least in theory. However, Fannie Mae’s regulator (the FHFA) recently capped the number of investment mortgages it can lend. And, since then, they’ve been harder to get — and more expensive.
The same cap mentioned in the last FAQ also applies to vacation homes. So the answer is technically ‘Yes’ — but you may have to work harder to find a loan. And you could find yourself paying a higher mortgage rate.
A 203k loan may be better if your FICO score is below Fannie’s 620 threshold. The FHA’s minimum is 580.
Once you’ve decided on a lender, you’ll apply and follow the processes in the “Step by Step” section, above. Naturally, you’ll want to comparison shop to make sure you get the best mortgage deal. But not all lenders offer HomeStyle loans so you’ll have to shop around a bit more than usual to find the three or more from which to request quotes.