Just like its FHA 203(k) cousin, Fannie Mae's HomeStyle Renovation Loan Program allows borrowers to purchase or refinance a home and include the cost of renovation work into one new loan. However, while the 203(k) restricts loan proceeds to owner-occupied primary residences, the HomeStyle program can be used for primary residences, second home or vacation home, and non-owner occupied investment properties as well. The HomeStyle program greatly increases the scope of the renovation work that can be done - from a simple refresh (paint and carpet) to curing structural defects to installing upgrades, including luxury features such as pools, hardscaping, and landscaping. HomeStyle loan proceeds may also be used to make substantial additions to a home.
In a regular mortgage (purchase or refinance), the value used to calculate the loan-to-value ratio (LTV) is determined by the appraisal, which is based on the selling prices of comparable homes near the subject property. This is called an "as-is" appraisal. For a HomeStyle renovation loan, the value of the property is determined by an appraiser who determines what the value of the property will be after the renovation work has been completed. Thus, the value in a HomeStyle program is called the "as-completed" value.
- Mortgage Pre-Approval - You wouldn't shop for a car without knowing how much you qualify for, so it only makes sense that, before beginning your search for home, you consult with a mortgage professional to find out the loan amount and terms for which you will qualify. When you will be looking for a property to renovate, it is important that you find a mortgage professional who has experience with the HomeStyle (or an FHA 203[k]) loan program. Your mortgage professional will communicate with your real estate agent regarding the maximum sale price and loan amount for which you will qualify.
- Shop/Offer/Ratify - Once you and your agent find a potential property, your agent will do an analysis of that property and the comparable sales. This analysis will take into account the scope and estimated costs of the renovation work, and look to see what the as-completed value might be. The objective of the analysis is to determine the amount you should offer the seller. Once the seller accepts your offer, you have a ratified purchase contract.
- Contractor's Estimate/HUD Consultant - Once you have a ratified contract (or, sometimes, while you are considering the amount you will offer), you will find a qualified contractor with whom you will work to create the Contractor's Estimate, which will detail the scope and cost of the proposed renovation work.
- Loan Submission/Appraisal - Together with the documents you have gathered for underwriting, your mortgage professional will submit the ratified contract and Contractor's Estimate to the underwriter, who will then order the appraisal. Again, the appraiser will evaluate and combine the current condition of the property with the scope of renovation work proposed to arrive at the official, as-completed value that will be used to calculate the LTV and other important elements of the loan.
- Underwriting/Approval - During the underwriting process, the lender will bring in a HUD Consultant (as the borrower, you have the right to shop for and decide which HUD Consultant to hire). The Consultant will make a formal evaluation of the property and proposed
scopeof work to ensure the result will be a house that is safe and habitable, and also that the proposed work is both necessary and acceptable under the HomeStyle product guidelines. Also, during underwriting, the lender will assign your case to one of its loan specialists, who will work with you and the contractor on the scope and cost of the work being done.
- Loan Approval/Settlement - At settlement, you will sign your loan documents and the loan proceeds will be disbursed. The lender will set up a special escrow account into which the funds for the renovation work will be deposited, and assign your case to one of its in-house renovation Loan Specialists. This Specialist will be the focal point for all the work and communications between you, the lender, the HUD Consultant, and the contractor, including disbursements made to the contractor during the renovation. DRAW SCHEDULE
- Renovation Work - After
settlement, the Loan Specialist, HUD Consultant, contractor and you will coordinate the work being done, including changes that come up during any renovation project. DRAW SCHEDULE
- Project Completion - Once the renovation work is complete, the appraiser and HUD Consultant will perform a final inspection of the home to ensure that the project is done and that necessary Use and Occupancy permits have been obtained by local inspectors. Upon final completion, the final draw will be released to the contractor. Any funds that remain in the renovation escrow account will be applied to the principal balance.
Generally speaking, as long as work being done to the property is permanently attached, adds value, and is not for commercial or business use, it is permitted.
With approval from the lender, a borrower can perform the rehab work, subject to three limitations:
- the do-it-yourself work does not exceed 10% of the as-completed value of the property;
- one-unit, owner-occupied property only; and,
- the borrower may only be reimbursed for the documented cost of materials and/or contract labor. The borrower MAY NOT be reimbursed for his or her labor.
Yes, HomeStyle loan amounts are subject to the maximum loan limits as established by the Federal Housing Finance Agency (FHFA). Loan limits vary by state and, in areas where there is a large variation in home prices, even by county. Current loan limits can be found here.
While some lenders might have overlays that augment the credit and underwriting requirements, for the most part, standard Fannie Mae credit and underwriting guidelines apply to the HomeStyle program.
As with any conventional loan, in order to avoid mortgage insurance, a 20% down payment is required. However, on a one-unit, owner-occupied property, borrowers can put down as little as 5%, plus closing costs. Subordinate financing is allowed, as are Community Seconds, which could potentially eliminate the need for any down payment. Absent subordinate financing, the table below shows the standard down payment requirements for various types of properties and occupancy:
|HomeStyle Renovation Loan Minimum Down Payment Requirements|
|Min Down Payment||Property/Occupancy||Loan Purpose|
|5%||One-unit primary residence||Purchase/Refi|
|15%||Two-unit primary residence||Purchase/Refi|
|10%||One-unit second home||Purchase/Refi|
|15%||One-unit investment property||Purchase|
|25%||One-unit investment property||Refi|
Yes, per Fannie Mae, "[s]tandard subordinate financing and Community Seconds are permitted."
The short answer is No. Upon completion of the rehab project, any excess cash is applied directly to the principal balance on the loan. While this does not decrease the monthly loan payment, over time it will reduce the amount of interest paid on the loan.
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