Prior to the housing bubble, with the help of television, finding and renovating a home was all the rage. It seemed that just about anyone could buy a fixer-upper, renovate it, and flip it for a sizable profit.
Enter December 2007 – June 2009. Triggered by a large decline in home prices, leading to mortgage delinquencies and foreclosures and ultimately the devaluation of housing-related securities, the collapse of the U.S. housing occurred. This collapse directly impacted home valuations, home builders, real estate and the mortgage market.
Mortgage financing went from being relatively easy to obtain, to tightened standards nationwide. Many mortgage programs went away, including most hard money and rehab loans.
FANNIE MAE’S REHAB LOAN
The HomeStyle® mortgage is essentially Fannie Mae’s version of FHA’s 203k rehab loan.
HomeStyle® offers homebuyers a convenient and economical way to add moderate home improvements, make repairs and renovations, with a single-close mortgage. No second mortgage, home equity line of credit, or other more costly methods of financing are necessary.
The HomeStyle® Renovation loan also enables homeowners to refinance their existing home, and include the necessary funds for renovation in the loan balance. The loan amount is based on the “as-completed” value of the home as opposed to the present value.
Unlike FHA’s 203k, Fannie Mae does not require the borrower to occupy the home as their primary residence. HomeStyle is also available to investors.
ADDITIONAL HOMESTYLE® HIGHLIGHTS
Just about any type of renovation or repair is eligible, as long it is permanently affixed to the home and adds value. Improvements can include basic remodeling, landscaping and appliances, or even include luxury items such as an in-ground swimming pool.
Once your loan is in place, an escrow account will be established from which you draw funds to pay for the repairs. Renovations need to be completed within 12 months.
Borrowers can choose their own contractor to perform the renovations, as long as there’s a construction contract in place and the contractor has been approved by your lender.
Renovation costs are limited to 50% of the “as-completed” appraised value. Renovation costs can include labor and materials, as well as soft costs such as architect fees, permits and licenses.
While some do-it-yourself work is allowable, the do-it-yourself financing cannot exceed 10% of the “as-completed” value. The property must also be a one-unit owner-occupied home for do-it-yourself work.
Sweat equity is permitted, but borrowers are limited to the reimbursement cost of materials, not the labor.
Borrowers can use gift funds for down payment and closing costs for owner-occupied primary residences, as long as they have a minimum investment of 3% of their own funds in the transaction.
The seller is allowed to contribute 3% in seller concessions, most commonly used to pay for some or all of the buyer’s closing costs.
BORROWER REQUIREMENTS FOR HOMESTYLE
The HomeStyle® loan requires the homeowner to work with a consultant to determine what repairs will be required for the loan.
To qualify for a HomeStyle® Renovation loan, borrowers will need to meet minimum credit standards.
In order to obtain the best financing terms, Fannie Mae requires owner occupants to a have score of 660. Lower credit scores are permitted, but interest rate adjustments and lower loan-to-value ratios will come into play.
HomeStyle loans are available to investors with just 15% down. Primary residences require a down payment of just 5%, and 10% down for second homes.
For investment properties or second homes, borrowers will need a minimum credit score of 700.
ANOTHER GREAT LOAN BY FANNIE MAE
The Fannie Mae HomeStyle® Renovation loan is an interesting alternative to the FHA 203k construction loan. Costs can be lower and the program tends to be simpler.
In a mortgage market that has limited options available to folks looking to buy a fixer-upper, or refinance and remodel, Fannie Mae’s HomeStyle® Renovation loan could be a be just what your home improvement project needs.