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CHOICERenovation Mortgage Guide and Program Requirements
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CHOICERenovation Mortgage Guide and Program Requirements

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
CHOICERenovation Mortgage Program Overview

The CHOICERenovation program enables you to purchase or refinance an existing mortgage on a home that needs significant renovations, repairs or upgrades and include funds for renovating the property in the mortgage amount.

Usually borrowers seeking to finance a major home renovation are required to obtain a separate construction or home equity loan which can be expensive and time-consuming. Additionally, standard mortgage programs usually use the pre-renovation property value to determine the loan amount you are eligible for, which usually limits your ability to finance the cost of renovations.

Using a single CHOICERenovation mortgage instead of two loans -- a construction loan and a permanent mortgage -- simplifies the home financing process, which saves you time and money. The program also uses the after renovation property value to determine the mortgage you qualify for, which enables you to include the cost of renovations in your loan amount.

For example, you can use the program to buy a home for $100,000 that requires $75,000 in renovations and include both the property purchase price and the cost of the renovations in the mortgage. Because a CHOICERenovation mortgage can be used for major home renovation or remodeling work it is ideal for buying or refinancing a fixer-upper.

Other benefits of the CHOICERenovation mortgage program include a low required down payment and the ability to use the program to rehabilitate investment properties in addition to owner occupied homes

Important CHOICERenovation Mortgage Considerations
Pros
  • Use a single mortgage to both renovate and buy or refinance a property
  • Low down payment requirement
  • Mortgage amount based on after renovation property value
  • Multifamily properties with up to four units and one unit investment properties are eligible
  • Permits the use of sweat equity with certain loan programs
  • Uses higher, super conforming loan limits
Cons
  • Takes more time to process and close your loan
  • Requires additional documentation from applicants and lender
  • Mortgage rate may be higher
  • May require higher closing costs and fees
  • Cap on how much you spend on renovation costs
  • Total tear downs are not permitted
How the CHOICERenovation Program Works

Find a Property and Select a Contractor

The first step in the CHOICERenovation application process is to find the property you want to buy or refinance and work with a contractor to develop a construction contract that outlines the scope and cost of the property renovations. Although you select the contractor, the lender confirms that the contractor is licensed and qualified to perform the specified property renovations.

The construction contract is included in your mortgage application and includes an itemized breakdown of labor and material costs. The contract and property rehabilitation plans must be prepared by a registered, licensed or certified general contractor, renovation consultant or architect.

The contract also outlines the estimated construction schedule which is used to determine when loan proceeds are disbursed. Additionally, the appraiser reviews the construction contract to asses the after renovation property value which is one of the main factors that determines the the mortgage you qualify for.

Select a CHOICERenovation Mortgage Lender

After you have selected the property and your construction contract is ready to go, your next step is to find a lender that offers CHOICERenovation mortgages. The program is offered through Freddie Mac-approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. CHOICERenovation mortgages take more time, effort and documentation to process and close so ideally you select a lender with extensive program knowledge.

We recommend that you contact multiple lenders in the table below to determine if they offer the CHOICERenovation mortgage program. Like with any mortgage, it is important to compare loan terms, including interest rates and fees, to other loan programs. Comparing multiple CHOICERenovation lenders is the best way to find the fixer upper mortgage that best meets your needs.

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Submit Your CHOICERenovation Mortgage Application

After you select your lender, the next step is to submit your loan application including the construction contract. The lender reviews the construction plans as well as your mortgage application including your personal and financial information to determine if you qualify for the loan and are eligible for the program.

Additionally, as part of the application process the lender provides the appraiser the construction contract so that the appraiser can determine the after renovation property value. The lender reviews the appraisal report to confirm that the post-renovation property value supports the mortgage amount you are seeking based on CHOICERenovation mortgage loan-to-value (LTV) ratio and loan limit guidelines.

The Mortgage Closes and the Property Renovation Funds Are Deposited into a Custodial Account

Assuming you qualify for the mortgage and the appraisal and inspection reports do not raise any significant issues, your application is approved and your loan closes. For a home purchase, when a CHOICERenovation mortgage closes the property seller receives his or her money, closing costs are paid to third parties and the remaining funds allocated to property renovations are placed in a custodial account (also known as an escrow account). The process for a refinance is similar except for instead of the seller receiving money for the home, your existing mortgage balance is paid in full.

After the work begins on your property, funds are released from the custodial account as renovations are completed, according to the project timelines provided by the construction contract. Typically, a lender-designated property inspector must confirm that the renovations are completed properly before funds from the custodial account are released. You have one year from the date your CHOICERenovation mortgage closes to complete the property renovations.

Contingency Reserve Requirement

You are required to deposit contingency reserve funds in the custodial account to pay for unexpected renovation expenses and potential cost overruns. For properties with working utilities, the contingency reserve requirement is at least 10% of total renovation costs. For example, if your total renovation budget is $75,000, you are required to deposit at least $7,500 in the custodial account to meet the contingency reserve requirement for a CHOICERenovation mortgage.

If the property utilities are not working, the minimum contingency reserve requirement is 15% of the total renovation budget. The maximum contingency reserve reserve is 20% of total project costs.

The contingency reserve can be funded through loan proceeds or out of pocket by the borrower. Any leftover contingency reserve funds are applied to the mortgage balance unless you fund the reserve with your own money in which case those funds revert back to you.

Monthly Housing Expense Reserve Funds

If you cannot live in the property due to the renovations you can include up to six months of total monthly housing expense, including your mortgage payment, property tax and homeowners insurance (PITI), in the CHOICERenovation mortgage amount. This mortgage payment reserve enables you to pay rent if you need to live in another property while work is being done on your home.

Property Renovations Are Completed

When the property renovations are completed, the inspector performs a final inspection verifying that all work has been done according to code and quality standards. After receiving the final inspection and appraisal reports the lender releases the remaining funds from the custodial account. The funds are used to pay any outstanding work invoices as well as other third party fees. Any remaining funds in the escrow account are applied to reduce your principal mortgage balance and the escrow account is closed.

Property Value and Loan Limits

After Renovation Property Value

The mortgage amount for a CHOICERenovation mortgage is based on the after renovation property value as opposed to the current fair market value, which provides a significant benefit for applicants. Lenders typically do not provide mortgages based on the after renovation value of a property, which limits the loan amount you are eligible for. Using the higher, after renovation property value enables you to qualify for a larger mortgage amount and eliminates the need to obtain a separate construction or home equity loan.

For home purchases, CHOICERenovation mortgage guidelines define property value as the lesser of:

For example if you are purchasing a property for $100,000 and want to make $75,000 in renovations (for a total value of $175,000) and the after renovation property value of the property according to an appraiser is $165,000, then the property value used to determine the mortgage you are eligible for is $165,000 and not $175,000. In this case, the appraised after renovation property value ($165,000) is less than the property purchase price plus the cost of the renovations ($175,000) but still significantly higher than the pre renovation property value.

For a CHOICERenovation refinance, the property value used to determine the mortgage you qualify for is the appraised after renovation property value.

Mortgage Limits

The CHOICERenovation mortgage program uses the super conforming loan limits. This means that if the property is located in a county with higher housing costs you may be eligible for a higher maximum mortgage amount.

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CHOICERenovation Program Requirements

Loan-to-Value (LTV) Ratio

The maximum loan-to-value (LTV) ratio for a CHOICERenovation mortgage varies depending on loan program, the number of units in the property and property usage. As outlined in the table below, when combined with the Home Possible program, the maximum LTV ratio is 97%. The LTV ratio applied to investment and multi-unit properties is lower, which means you are required to make a higher down payment.

CHOICERenovation Maximum LTV Ratios
One Unit Primary Residence (Home Possible Program)
  • 97% LTV ratio
One Unit Primary Residence (HomeOne Program)
  • 97% LTV ratio (must be first-time home buyer if LTV ratio is greater than 95%)
Two Unit Primary Residence
  • 85% LTV ratio
Three - Four Unit Primary Residence
  • 80% LTV ratio
Second Home
  • 90% LTV ratio
One Unit Investment Property
  • 85% LTV ratio
Manufactured Home
  • 95% LTV ratio

Down Payment

Based on CHOICERenovation LTV ratio guidelines, you can use the program to purchase a single unit property with a down payment as low as 3%. For example, if you buy a house for $100,000 and want to make $175,000 in renovations (for a total value of $175,000), you are required to make a down payment of 3.0% of the after renovation property value, or $5,250. In this case, you obtain a $169,750 CHOICERenovation mortgage to pay for the remaining property purchase and renovation costs.

Please note that if you make a down payment of less than 20%, the lender typically requires you to pay private mortgage insurance (PMI) which is an extra monthly cost in addition to your mortgage payment.

Renovation Project Costs for a CHOICERenovation Mortgage

Renovation costs may include labor and materials as well as soft costs (e.g., architect, permit, appraisal, title and inspection fees). Funds cannot be used to completely tear down and construct a new property. Additionally, aside from installing appliances, funds cannot be used on items that are not permanently attached to the property. When combined with the Home Possible program, a limited amount of sweat equity is also permitted.

CHOICERenovation mortgage proceeds may also be used to fix property damage caused by a natural disaster or to pay for renovations that are designed to prevent damage from natural disasters, including retaining walls, storm surge fortification and foundation reinforcements.

All property renovations are required to comply with all state and local laws including applicable building and zoning regulations and codes. Additionally, you are required to obtain all necessary permits before starting the renovation work.

According to CHOICERenovation program guidelines, for a property purchase, total renovation costs cannot be greater than the lessor of 75% of the purchase price plus the renovation costs or the appraised after renovation property value. For example, if the after renovation property value is $175,000, the maximum you could spend on renovations is $131,250 ($175,000 * 75% = $131,250).

For a refinance, total renovation costs cannot exceed 75% of the appraised after renovation property value. For manufactured homes, the total renovation costs must be less than $50,000 or 50% of the appraised after renovation property value, whatever is lower.

CHOICERenovation Program Property Eligibility

Properties eligible for the CHOICERenovation Program include one-to-four unit primary residences, single unit second homes and investment properties and manufactured homes. For multifamily properties at least one of the units needs to be occupied by the mortgage applicant.

Applicant Qualification Requirements

Credit Score

The minimum required credit score for a CHOICERenovation mortgage depends on your loan-to-value (LTV) ratio, debt-to-income ratio, mortgage program and property type. The required credit score for a single unit property is usually 660. The minimum credit score is for multifamily properties, second homes and investment properties is usually higher.

Debt-to-Income Ratio

The maximum debt-to-income ratio for a CHOICERenovation mortgage ranges from 43% to 45%. The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense, including your mortgage payment, property tax, homeowners insurance and PMI, plus payments for other monthly debts such as credit card, car, personal and student loans.

Borrower Reserves

Depending on your credit score, debt-to-income ratio, loan program and number of units in the property, the CHOICERenovation program guidelines may require you to hold savings in reserve when your mortgage closes. There is usually no reserve requirement for a single unit property and you are required to hold two months of total monthly housing expense in reserve for a multifamily property. Investment properties usually require higher reserves, depending on the number of properties you own. Be sure to check with your lender to understand the reserve requirement that applies to you as this can be a significant financial commitment in addition to your down payment and closing costs.

First-Time and Repeat Home Buyers

The CHOICERenovation program is available to both first-time and repeat home buyers although you are required to be a first-time home buyer to use the program with the HomeOne program.

Program Costs and Fees

Mortgage Rate

The mortgage rate on a CHOICERenovation mortgage may be higher than the rate on a regular home loan. The rate is higher because fixer upper mortgages involve additional risk and require extra work and documentation. You should always compare multiple lenders to find the mortgage with the lowest rate and fees.

Extra Costs

Because a CHOICERenovation mortgage involves significantly more work and documentation to process and close, you are typically required to pay higher closing costs as compared to a standard mortgage. In addition to regular mortgage closing costs, you may be required to pay a higher lender fee in addition to property inspection, appraisal and title fees. You are also required to pay architecture, engineering, construction, licensing and permit fees for the home renovation project although these fees can be added to your loan.

Additionally, due to the added requirements for fixer upper loans, CHOICERenovation mortgage can take three months or longer to close as compared to approximately half that time or less for a standard mortgage.

Private Mortgage Insurance (PMI)

If your LTV ratio exceeds 80%, you are required to pay private mortgage insurance (PMI), which is an ongoing monthly cost in addition to your mortgage payment. In short, PMI protects the lender in the event that you default on your mortgage. The amount of PMI you are required to pay depends on your credit score, LTV ratio and other factors. The PMI for a CHOICERenovation mortgage is cancellable which means the fee is removed when your LTV ratio falls below 80% to 78%.

Mortgage Program and Type

Mortgage Program

Fixed rate mortgages and adjustable rate mortgages (ARMs) are eligible for the CHOICERenovation program while interest only mortgages are not not allowed.

Mortgage Type

The program applies to both home purchases and refinances although cash-out refinances are not permitted according to program guidelines.

Combining a CHOICERenovation Mortgage with other Freddie Mac Programs

You can combine a CHOICERenovation mortgage with other Freddie Mac programs including the Home Possible and HomeOne programs. These programs, which as also provided by participating lenders, offer additional features that may make it easier to qualify for a mortgage, especially for fist-time home buyers with limited financial resources.

Related FREEandCLEAR Resources

Sources

"CHOICERenovation Mortgages."  Originating & Underwriting.  Freddie Mac, 2019.  Web.

About the author
Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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