If you're looking to buy a fixer-upper home and renovate it, you might be considering Fannie Mae's HomeStyle Renovation program. The program, like similar products offered by private lenders and with FHA loans, allow you to include both the costs of buying a home and those needed to renovate it all in one loan product.
And in good news? Fannie Mae just updated its HomeStyle program to make it even more attractive to borrowers.
The HomeStyle program ranks as a viable alternative to other big home improvement loan programs that borrowers often turn to, such as the FHA 203(k) loan. Both loans allow you to borrow money for buying a home and improving it.
Vincent Nepolitan, national renovation sales manager at Planet Home Lending in Aliso Viejo, California, said that the HomeStyle and FHA 203(k) are nearly identical. The big difference lies in qualifying for these products, Nepolitan said, with the FHA version a better fit for borrowers who might have missed or late payments in their recent past or who otherwise might need bad credit mortgages.
"The biggest difference between them is what you have to do to qualify," Nepolitan said. "FHA is more lenient than HomeStyle if you have credit challenges or a lot of debt."
A smaller down payment
One of the more important HomeStyle changes that Fannie Mae has enacted? You now need a smaller down payment.
That’s good news for borrowers, but these borrowers do need to know the difference between how down payments work on traditional mortgages and how they work with HomeStyle loans.
Laurie Souza, business development manager for specialty/renovation lending with Danvers, Massachusetts-based Mortgage Network, said that the down payment requirements for a HomeStyle loan can be confusing.
In a traditional mortgage, when you are using a loan just to buy a home, your lender will base your down payment on a percentage of the home's purchase. If a home costs $100,000, and the buyer is putting down 5 percent, then the down payment equals $5,000.
That down payment formula gets more complicated with the HomeStyle loan, Souza said. Fannie Mae now allows you to borrow up to 97 percent of the combined purchase price and estimated renovation costs. This means if your home costs $200,000 and your renovations are expected to cost an additional $100,000, you can finance up to $291,000.
Your down payment, then, would be 3 percent of that $300,000 final price, or $9,000.
Not all borrowers, though, are eligible for this 3 percent down payment. Under Fannie's rules, you must be buying and renovating a primary residence, not a vacation home or rental. You also can't buy or refinance a multi-unit property.
All higher-LTV loans must also be approved through Fannie Mae's Desktop Underwriter automated underwriting system, and can’t be underwritten manually.
Manufactured homes eligible
You can now purchase and renovate a manufactured home, too, through the HomeStyle program. The improvements you can make, though, are limited.
Under Fannie's guidelines, you can only take on non-structural changes such as updating a kitchen or bathroom, adding a cooling system or installing accessibility features to serve disabled and older residents.
You can't use HomeStyle to alter the structure of a manufactured home. Adding a sun porch, building a garage or constructing a storage shed, then, would not be allowed under the program.
A bigger renovation budget
Another big change? Borrowers who are financing traditional homes -- not manufactured ones -- can now finance heftier renovations. Renovations will qualify if they cost up to 75 percent of the purchase price of the home plus the estimated renovation costs or 75 percent of the estimated value of the home after the renovations are completed, whichever is less.
This can be confusing, so here's an example:
Say you are buying a home that costs $200,000 and you are also financing $100,000 worth of improvements. The total of 75 percent of the acquisition cost of the home (a figure that comes out to $150,000) plus the estimated renovation costs of $100,000 means that you can finance a total of $250,000 worth of improvements.
But say the estimated completed value of your home after your improvements comes in at $340,000. A total of 75 percent of that figure equals $255,000.
You are eligible, then, to finance up to $250,000 worth of renovations, because that figure is lower than the $255,000.
If you want to finance $100,000 of renovations, you'll fall well within that $250,000 maximum.
The limits are different for manufactured homes. The cost of renovations on a manufactured home can only be 50 percent of the property's completed value or $50,000, whichever figure is less.
Is it allowed?
Before taking out any improvement loan, you need to make sure your renovations are allowed under the guidelines. Ask your lender at the very beginning of the process if the home-improvement project you are considering is allowed.
"The FHA 203(k) program does not allow for 'luxury' items such as adding an in-ground swimming pool," Souza said. "However, the Fannie Mae HomeStyle would allow for this type of improvement."
While programs such as the HomeStyle loan do make it easier to cover the costs of a home renovation, they can also be less than flexible. That can cause problems for borrowers, said Evan Roberts, a real estate agent and owner of Dependable Homebuyers in Baltimore.
That's because these renovation programs require a predetermined draw schedule and place restrictions on who can work on the renovations, he said.
"If you get halfway through the renovation and decide that you'd like to upgrade the counter tops or expand the scope to include new windows, that additional cost must come out of your pocket," Roberts said. "All of the work must also be completed by licensed contractors, so hiring a low-cost handyman for certain tasks or doing some work yourself is not an option."