Home Renovation Loan

A HomeStyle Renovation Mortgage (HRM) allows homeowners to include renovations and improvements in the purchase or refinance of their home. The program is available to people purchasing a primary residence or second home, investors, nonprofit profit organizations, and government agencies. The HRM covers improvement projects that total up to 75% of the as-completed value of the home with a first mortgage, which generally has more-favorable terms than a second mortgage or other home equity loan.
 

Though it is an excellent option for financing a variety of remodeling projects, the Fannie Mae HomeStyle Renovation Loan does come with rules and qualification requirements.

As a homeowner, you do not actually apply for your loan directly with Fannie Mae. Fannie Mae is a government-sponsored entity (GSE) that provides liquidity for lenders so that they can offer home purchase and renovation loans to more people.

This means that you will have to apply with a lender that is approved by Fannie Mae. However, the lender has to provide very specific terms so that Fannie Mae will purchase the loan.

The terms are similar to what you will see on standard home loans. You can get 15- or 30-year terms, and the interest rate will depend on your credit history. Both fixed and variable rates are available.

The loan can be for up to 75% of the appraised property value once your contractor completes the renovations. You can apply for a loan for your primary residence of one to four units or a second home or investment property. Condos and co-ops are eligible, as are manufactured homes. The maximum loan for the latter is the lesser of $50,000 or the as-completed appraised value. 

Any type of renovation is eligible, but it needs to be attached to the property, and the completion date cannot be more than 12 months after the date of the loan delivery.

 

While this loan is an excellent option for funding major renovations, it does have some requirements that you need to meet before you can be certain of approval. Once you are ready, you can start the application process online. 

First of all, a Fannie Mae HomeStyle Loan requires a 3% down payment for renovations on a primary residence. If you have a prefabricated or manufactured home, that figure rises to 5%. Multi-unit properties and second homes have higher down payment requirements (10% or more).

You also need a credit score of at least 620 on the FICO scale to qualify for a HomeStyle Renovation Loan. However, if you have a high income-to-debt ratio, you may need a higher score. A “high” ratio is above 45%, while those with a debt-to-income percentage of 36% or lower are considered low-risk applicants by most lenders and can qualify for the best terms and interest rates.

You will also need to prove income and repayment ability. Lenders will typically ask you to provide tax returns, pay stubs, or other documents that show a regular flow of money that you can use to repay your loans. These documentation requirements are the same for any type of mortgage application. You can submit most of it online. 

If you feel that you can meet the financial requirements, you can start the application process with a Fannie Mae-approved lender that offers HomeStyle loans. Companies like Competitive Home Lending serve as mortgage brokers who can connect you with favorable HRM options in your area.

After you have found a lender, the next step is to decide on the renovations that you want to have done. You then need to find an approved contractor, architect, or other professional who is qualified to work on the project. This step is necessary because these professionals will have to put together a proposal that provides details about the project.

After the proposal — which includes a detailed budget — is complete, an appraiser will look at the current property and the proposed improvements. They will then determine the “as completed” value, which is the projected value of the property after the project is done. Again, the amount of the loan can be up to 75% of the “as completed value” of the property. For manufactured homes, the limit is 50% of the “as completed” value or $50,000, whichever is less.

You, your contractor, and the appraiser take all the necessary information to the lender, who completes an official worksheet and decides on the final loan amount and the terms of the loan.

The next steps happen between the contractor and the lender. Here is what you can expect:

• First of all, the lender sells your approved loan to Fannie Mae, but the lender still oversees the process by putting the funds in a custodial account and ordering inspections during the process.  

• The contractors and other professionals then request funds from this account. Once the request gets approved, they begin work. 

• The lender performs inspections during the work to ensure that each phase of the renovation is completed to their satisfaction. This extra step protects against fraud, and it also ensures that you get the full value out of the renovation. 

• After all the work is done, the lender performs a final inspection. The project needs to be completed within one year of receiving the loan.

• If the work meets agreed-upon specifications, the lender certifies that the project is complete. 

The lender is responsible for sending the relevant documentation to Fannie Mae, which holds your mortgage. 

There are a number of reasons to get a home renovation mortgage. In the current housing market, the cost of renovations are lower than the cost of purchasing a new home. Refinancing with a HRM can make such renovations possible without requiring you to get a second mortgage or other home-equity-based loan, which typically have less-favorable terms. 

Furthermore, home prices are rising, and choosing to renovate can allow you to build upon the equity that you already have in your home. Since experts expect growth in the real estate market to continue, renovating will provide more value than selling and purchasing a new home at currently high prices.

Whatever your reason for remodeling, the advantageous terms and well-defined requirements of a Fannie Mae HomeStyle mortgage make it an excellent option for funding your project. You can start the application process online today. 

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