Fannie Mae Homestyle renovation loans: what they are and how they work

Whether you’ve fallen in love with a fixer-upper or have a list of renovations that you want to do to turn your current home into your forever home, there’s a good chance you’re going to need to borrow money to make this a reality.

And one option that you might be considering is a Fannie Mae HomeStyle loan.

What is a Fannie Mae HomeStyle Loan?

A Fannie Mae HomeStyle loan is a government-sponsored product that lets you finance the purchase (or refinance) and renovation of a property into a single loan.

As opposed to taking out a traditional mortgage and using another loan to pay for renovations, it’s a type of home renovation loan that combines the funds you need to buy and renovate into one loan. This means that borrowers will face just one set of closing costs and have just one monthly payment to make.

These loans can also be used to refinance and pay for a remodel on an existing property. They come as either 15 or 30 year fixed-rate mortgages or adjustable-rate mortgages that have a minimum down payment requirement of 5% of the combined cost of the property plus repairs (although a 97% LTV may be available to first time homebuyers).

How Much Can You Borrow With a Fannie Mae HomeStyle Loan?

With a HomeStyle loan, you can borrow up to 95% of a property’s after renovation value up to Fannie Mae’s maximum loan limit of $548,250 (or $822,375 in high-cost markets).

And to give an example, if your home will be worth $500,000 after renovation work has been completed, you could borrow $475,000 (to cover the combined cost of the property, the renovation and renovation closing costs).

It’s this ability to borrow based on your home’s after renovation value that increases your borrowing power and can make it easier for you to get the funds you need to carry out repairs and renovation work without having to have built up tappable equity.

How Does A Fannie Mae HomeStyle Loan Work?

Whether being used to buy and repair a fixer-upper or to refinance your current home to pay for renovations, here’s how this type of loan works:

1. Find a fixer-upper for sale that needs renovation repairs or decide to renovate your home by borrowing against its after renovation value
2. Find a Fannie Mae-approved lender and apply for the loan.
3. Work with an approved contractor and/or architect to draw up and finalize your plans and prepare a detailed bid for the renovations. A copy of these must then be supplied to the lender.

(Your lender will send all estimates to a HUD consultant, they perform a specification of repairs, which is an evaluation of the estimate to make sure that you’re being charged the right amount of money for the renovation by the contractor.)

4. The lender will then perform an appraisal based upon the after renovated value of the property.
5. Close on the loan.
6. After the loan closes, the lender will place the renovation funds in an escrow account. If your renovation amounts are greater than $35,000, or structural in nature, a HUD consultant must be hired to authorize the release of the funds. The funds can only be released after a progress inspection from the HUD consultant.
7. Your renovation must begin within 30 days of the loan closing and must be completed within a six month period. Your contractor will be paid according to the draw schedule and following inspections.
8. The lender manages draws based upon these inspections (intervals at which contractors can request funds). 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 and is completed in a workmanlike manner. 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.

It’s important to remember that steps one through five must be completed before you can close on the property if you’re using the loan to purchase your home.

The reality is that the process is complex and confusing, and delays during this are common.

How To Qualify For a HomeStyle Loan

In order to quality for a HomeStyle loan, borrowers must meet the following lending criteria as set out by Fannie Mae:

What Renovations Can A HomeStyle Loan Be Used For?

HomeStyle loans have fewer restrictions than FHA 203ks, and allow for both cosmetic and structural repairs and improvements to be made. And this means that luxury items are permitted.

That said, the borrower and property must meet the eligibility criteria outlined above.

Just some of the renovation projects that could be financed with a HomeStyle include:

• Full house remodel
• Kitchen remodel
• Bathroom remodel
• Swimming pool addition
• Tennis court addition
• Barbecue area addition
• Financing an ADU (See additional qualifications)
• Landscaping
• Basement finishing

It’s important to note that these loans cannot be used to tear down and reconstruct a home, nor can structural additions add another unit to the property (e.g. they cannot be used to turn a single unit property into a two unit one).

The Pros and Cons of a HomeStyle Loan

There are pros and cons of Fannie Mae HomeStyle loans that you’ll need to consider before deciding whether this type of financing is the best way to pay for a renovation:

While you can clearly see that HomeStyle loans offer a number of benefits to homebuyers looking to take out a single loan to purchase a property and renovate it, or for homeowners to refinance their existing mortgage to cover the cost of a remodel, it’s also difficult not to ignore the drawbacks that come with this financing option.

And while a HomeStyle loan is the best option for some people, many will find that an alternative gives them an increased level of flexibility, less hassle or lower monthly payments.

Keep reading and we’ll look at these alternatives.

Can You Use A HomeStyle Loan To Refinance & Renovate Your Current Home?

While Fannie Mae HomeStyle loans are commonly used as a way for homebuyers to finance the purchase and renovation of a fixer-upper in a single loan, they can also be used by current homeowners to finance their renovation wishlist. 

You will need to refinance your existing mortgage, and this could mean you need to do so onto a higher rate. 

The same criteria and eligibility requirements for these loans apply when using them to refinance and renovate your home as when they’re used to buy and renovate. 

Fannie Mae Homestyle Loans vs FHA 203k Loans

It’s common for Fannie Mae HomeStyle loans to be considered as an alternative to FHA 203k loans, and in many ways, these two types of construction loans are very similar.

Both of these loans let you combine the costs of purchasing (or refinancing) and renovating a property and borrow based on the after renovation value, but there are a few differences that you need to consider.

In comparison to HomeStyle loans, FHA 203k loans offer:

• A lower minimum down payment requirement of 3.5%.
• A lower minimum credit score requirement of 580+.
• Cannot be used for vacation homes or investment properties.
• Require an upfront Mortgage Insurance Premium of 1.75% of the loan amount and .8% monthly.
• In some cases, interest rates are higher than on HomeStyle loans.

Maximum loan amounts are typically lower (location dependent based upon FHA mortgage limits).

When comparing Fannie Mae HomeStyle loans and FHA 203k loans, a main influencing factor is going to be your credit score.

To get a HomeStyle loan, you’ll need a minimum score of 620, whereas for an FHA 203k, you’ll qualify with a lower score of 580.

If you have the credit score to qualify for a Fannie Mae HomeStyle, the benefits are incomparable in the long run and this will be the better option.

But, that doesn’t mean there aren’t alternatives to these two types of loan. However, the reality is that many people aren’t aware that they exist.

And this is why it’s so important to explore your options before making a decision to make sure you’re going down the most suitable route.

Introducing RenoFi Loans - An Alternative To A HomeStyle Loan

Let us introduce you to RenoFi Loans, a new type of home renovation loan that combines the best elements of a construction loan with a home equity loan.

You see, a RenoFi Loan allows you to borrow based on your home’s after renovation value but does not require you to refinance your existing mortgage like the other types of home renovation loans do. It’s the only loan of this type that won’t require you to refinance, in fact.

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
• Same low fixed rates as traditional home equity loans
• Ability to borrow up to 90% of your home’s after renovation value
• The full loan amount is available at closing
• You won’t need to refinance your existing mortgage

If you’re interested in learning more about whether a RenoFi Loan might be the right way for you to finance your renovation, schedule a call or chat with one of our team to discuss your options and help you to get the home you want on your terms.

Fannie Mae Homestyle Loans vs Other Ways of Financing Home Improvements

Aside from FHA 203k loans and RenoFi Loans, other common alternatives to HomeStyle’s for financing home improvements include:

• Home equity loan
• Home equity line of credit
• Cash-out refinance
• Personal loan (often marketed as home improvement loan) & credit cards

And while equity is a common way to pay for home renovations, there’s just one problem with this. One that RenoFi CEO & Co-Founder Justin Goldman touches upon:

“The two most popular existing financial products used to finance home renovations - cash-out refinance or a home equity loan - are not designed for renovations. While they can work well for long-term homeowners (those who’ve been in their homes 10+ years), they don’t serve recent homebuyers who haven’t yet built up equity.”

As an example, take a look at just how long it takes a new homebuyer to build up $100k in tappable equity (based on a $400k house with a 15% down payment):

The reality is that it could take recent homebuyers 10 years or more to be able to afford to carry out their full renovation wishlist by using equity. 

And we don’t think you should have to wait that long, especially when the reality is that most renovation projects will increase the value of your home. 

For this reason, many turn to high-interest personal loans or credit cards, however in our opinion, this is one of the dumbest things that homeowners do when paying for a renovation, alongside draining emergency savings, borrowing from their 410k or refinancing onto a higher rate. 

Take the time to understand your options and choose the financing option that is right for you and that gives you the maximum borrowing power at the lowest possible cost. 

The Importance Of Choosing The Right Renovating Financing Option

Don’t rush into making a decision around the best way to finance your renovation as this can end up being an expensive mistake.

But we get it, not everyone who is considering a HomeStyle loan knows that other options exist (except, perhaps the FHA 203ks). 

The reality is, though, that most people who are looking to finance their renovation don’t need to be using traditional options that add a whole load of complexities to the process. Especially not when a RenoFi Loan could offer the same benefits without the need to refinance, along with lower fees and interest rates.

FAQs on Fannie Mae Homestyle Renovation Loans

Speak to one of our advisors and find a lender offering RenoFi Loans in your area today and thank us later for introducing you to an alternative to HomeStyle loans.