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How a HomeStyle Renovation Mortgage Works

How a HomeStyle Renovation Mortgage Works

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
  • Important HomeStyle Renovation Mortgage Considerations
  • Pros Cons
    • Finance a home purchase or refinance plus home renovations with a single loan instead of multiple loans
    • Using one loan saves borrowers money and time
    • Low down payment / equity position required
    • Mortgage amount based on as-completed property value
    • Investment properties and second homes are eligible
    • Applies to both purchases and refinancings
    • Higher interest rate
    • Higher closing costs and extra fees
    • Loan and renovation project budget limits
    • Longer mortgage closing timeline
    • Requires extensive documentation
    • Sweat equity is not allowed
  • HomeStyle Renovation Mortgage Program Overview
  • The Fannie Mae HomeStyle Renovation program enables borrowers to purchase a home that needs repairs, remodeling or renovations, or refinance the mortgage on their existing home and include funds for renovating or rehabbing the property in the loan amount.  Usually borrowers seeking to finance a major home renovation project are required to obtain a separate construction or home equity loan which can be expensive and time-consuming.  Using one HomeStyle Renovation mortgage instead of two separate loans simplifies the home renovation financing process, saving you money and time.  The program can be used for major home renovation projects or complete "tear-downs", making it well-suited for borrowers looking to buy or refinance a “fixer-uppers.”  The program is comparable to the FHA 203(k) Home Loan Program although the HomeStyle Renovation program does not require the borrower to pay an FHA mortgage insurance premium (MIP).

  • How the HomeStyle Renovation Program Works
  • Find a Property and Select a Contractor

    The first step in the HomeStyle Renovation Mortgage process is to find the property you want to buy or refinance. The next step is to select a certified contractor to prepare a thorough report that details the property renovations you intend to make. The contractor report includes a detailed description of the property renovations as well as the estimated cost for the improvements including an itemized breakdown of labor and material costs.

    Although borrowers select the contractor to perform the renovations, the lender is required to review the contractor to determine if they are qualified to perform the required renovation work.  Borrowers must provide a construction contract and submit plans and specifications for the renovation that are prepared by a registered, licensed, or certified general contractor, renovation consultant or architect.  The plans should describe the renovation work to be completed and provide an indication of costs and when various jobs or stages of completion will be scheduled.  The appraiser will review the renovation plan to determine the as-completed property value which is one of the factors that will determine the size of mortgage for which you qualify.

    Select an HomeStyle Renovation Mortgage Lender

    The next step is to find a lender with experience processing and closing HomeStyle Renovation mortgages. The program is offered through Fannie Mae-approved lenders such as banks, mortgage banks, mortgage brokers and credit unions. Because of its the unique requirements, in most cases Fannie Mae-approved lenders must receive a special designation to offer the program. HomeStyle Renovation Mortgages are more challenging to process and close so it is important to select a lender that understands how they work. 

    Contact multiple lenders in the table below to determine if they offer HomeStyle Renovation mortgages. We recommend that you compare the terms and requirements for a HomeStyle Renovation loan to other home renovation mortgage programs. Shopping multiple lenders and programs is the best way to find the mortgage that meets your needs.

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  • Submit Your HomeStyle Renovation Loan Application

    After you select a lender, the next step is to submit a mortgage application including any engineering or contractor reports and architectural designs. The lender reviews the designs and reports as well as your loan application including your personal and financial information to determine if you qualify for the mortgage and are eligible for the program. Additionally, as part of the application process the lender provides the appraiser the renovation project designs and reports so that the appraiser can determine the as-completed value of the property, reflecting the renovations.  The lender reviews the appraisal report to determine if the as-completed property value supports the loan amount you are seeking based on HomeStyle Renovation Program loan-to-value (LTV) ratio and loan limit guidelines.

    Mortgage Closes and Home Improvement Funds Released to Escrow Account

    Assuming you qualify for the loan and the property appraisal and inspections do not raise any issues, your loan application is approved and eventually your mortgage closes and funds. For a home purchase, when an HomeStyle Renovation 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 an escrow account. For a refinance, your existing mortgage balance is paid in full, closing costs are paid and the remaining proceeds are placed the escrow account for property improvements. Funds are released from the escrow account as the property renovations are completed, according to the project timelines provided by the contractors. A lender-appointed property inspector must verify that work has been completed properly before the lender releases funds from the escrow account. Borrowers have one year from the date the mortgage closes to complete the home renovation project. 

    Contingency Reserve Requirement

    For two-to-four unit properties, borrowers are required to include a contingency reserve equal to 10% of the renovation project costs although the lender may require a 15% contingency reserve in some cases. The contingency reserve is included in the escrow account to cover any cost overruns or unexpected expenses that are common with significant home renovation projects.  The contingency reserve can be funded through mortgage proceeds or out of pocket by the borrower.  Any leftover funds from the contingency reserve are applied to the mortgage balance unless borrowers fund the reserve with their own funds.  The contingency reserve requirement is optional for single unit properties although many HomeStyle Renovation applicants allocate a portion of their loan proceeds to a contingency reserve.

    Mortgage Payment Reserve Funds

    If borrowers cannot live in their property due to the renovations they can include up to six months of monthly housing payments, including property tax and homeowners insurance (PITI), in the HomeStyle Renovation mortgage amount.  This mortgage payment reserve assists borrowers who need to pay rent to live in another property while renovations are being done on their home.  The monthly payment reserve is only permitted for the period during which the home is uninhabitable due to the renovations and all monthly payments are made directly to the lender from the escrow account.  Any remaining mortgage payment reserve funds are applied to the mortgage balance.

    Home Improvement Project Completed

    When the home appraisal project is completed, the property inspector performs a final inspection verifying that all work has been completed properly.  Additionally, the lender orders an appraisal update to confirm the as-completed value of the property.  After receiving the final inspection and appraisal update reports the lender releases the remaining funds from the escrow account. The funds are used to pay any outstanding contractor invoices as well as inspection and other third party fees. Any remaining funds in the escrow account are applied to the mortgage balance and the escrow account is closed.

  • Property Value and Loan Limit
  • As-Completed Property Value

    The loan amount for a HomeStyle Renovation mortgage is based on the “as-completed” value of the property after the renovations rather than the present value, which is a significant advantage for borrowers. Lenders typically do not provide a mortgage based on the post-renovation value of a property which means that borrowers qualify for a smaller mortgage and are required to arrange a separate loan to finance home improvement projects.  Using the higher as-completed property value enables borrowers to qualify for a larger mortgage and removes the need to obtain a separate construction or home equity loan.  For home purchases, HomeStyle Renovation Program guidelines define property value as the lesser of:

    • purchase price plus the cost of the renovations; or,
    • the appraised as-completed value of the property

    For example if you are purchasing a property for $200,000 and want to make $100,000 in renovations (for a total value of $300,000) but the as-completed value of the property according to an appraiser is $280,000, then the property value used to determine what size mortgage you can obtain with the HomeStyle Renovation Program is $280,000 and not $300,000.  In this case, the appraised as-completed property value ($280,000) is less than the property purchase price plus the cost of the renovations ($300,000 = $200,000 + $100,000).

    Loan Limit

    The HomeStyle Renovation Program only applies to conforming loan amounts ($484,350 or below for a single unit property in most counties) which limits the size of mortgage you can obtain.

    Our free personalized mortgage quote features enables you to review no obligation loan proposals from leading lenders. Our quote form is easy-to-use, requires minimal personal information and does not impact your credit.  Comparing multiple loan quotes is the best way to save money on your mortgage.

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  • HomeStyle Renovation Loan Requirements
  • Loan-to-Value (LTV) Ratio

    The maximum loan-to-value (LTV) ratio required for the HomeStyle Renovation Program varies depending on mortgage type, the number of units in the property and if the property is owner-occupied or not.  According to program guidelines, the maximum LTV ratio for fixed rate mortgage on a single unit property is 97%.  As demonstrated by the table below, the program allows higher LTV ratios for fixed rate mortgages on owner-occupied properties, which means a lower required down payment for the borrower.

  • Fixed Rate Mortgage Adjustable Rate Mortgage
    Owner-Occupied Properties
    One Unit 97% 95%
    Two Unit 85% 85%
    3-4 Units 75% 75%
    Second Home
    One Unit 90% 90%
    Investment Property
    One Unit Purchase 85% 85%
    One Unit Refinance 75% 75%
    Manufactured Home
    One Unit Purchase 95% 95%
    Cash-Out Refinance 65% 65%
    Source: FannieMae.
  • Down Payment

    Based on the HomeStyle Renovation LTV ratio guidelines, borrowers can use the program to purchase a property with a down payment as low as 3%.  For example, if the borrower uses a fixed rate mortgage to purchase a single unit property for $150,000 and wants to make $150,000 in renovations (for a total as-completed property value of $300,000), the borrower is required to make a down payment equal to 3.0% of the as-completed property value, or $9,000, and then obtain a HomeStyle Renovation loan for $291,000 to pay for the remaining cost of the property purchase and renovations. If you make a down payment of less than 20% the lender will typically require that you pay private mortgage insurance (PMI) which is an extra ongoing monthly cost on top of your mortgage payment.

  • Renovation Project Costs for the HomeStyle Renovation Program
  • Renovation costs may include labor and materials as well as soft costs (architect fees, permits, licenses).  The borrowers can include “Do-It-Yourself” costs in the mortgage as long as the amount of these costs does not exceed 10% of the as-completed value of the property.  The reimbursement for “Do-It-Yourself” costs is limited to the cost of materials or the cost of properly documented contract labor.  Unlike the FHA 203(k) Program, sweat equity may not be reimbursed with a HomeStyle Renovation mortgage.

    The value of the renovations can total up to 75% of the as-completed appraised value of the property. For example if the as-completed value of the property is $300,000, you can borrow $225,000 for renovations, repairs and remodeling. Any type of renovation or repair is eligible, as long as it is permanently affixed to the property and adds value. Examples of renovations include remodeling a kitchen or bathroom or adding a second floor or garage to the property.

  • HomeStyle Renovation Program Property Eligibility
  • Properties eligible for the HomeStyle Renovation Program include one-to-four unit principal residences.  For multi-unit properties at least one of the residences needs to be owner occupied, or lived in by the individual(s) who obtained the mortgage to purchase the property.  Single unit second homes and investment properties are eligible for HomeStyle Renovation loans, unlike the FHA 203(k) Home Loan Program which only applies to owner-occupied properties.

    Manufactured homes are also eligible for the program as long as the renovations do not include structural changes to the home.  According to program rules, the value of renovations to manufactured homes cannot exceed the lesser of $50,000 or 50% of the post-renovation appraised home value.

  • Borrower Qualification Requirements
  • Credit Score

    The minimum required credit score for a HomeStyle Renovation 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 ranges from 620 for borrowers with lower LTV and debt-to-income ratios to 700 for borrowers with an LTV ratio greater than 75% and debt-to-income ratio of 45%.  The minimum required credit score is slightly higher for adjustable rate mortgages (ARMs), multi-family properties, second homes and investment properties.

    Borrower Debt-to-Income Ratio

    The maximum debt-to-income ratio for a HomeStyle Renovation mortgage is typically 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 plus payments for other monthly debts such as credit card, auto and student loans. Total monthly housing expense includes your monthly mortgage payment plus other housing-related expenses such as property tax, homeowners insurance and private mortgage insurance (PMI) as well as other potentially applicable expenses such as homeowners association (HOA) fees.  Please note that borrowers with higher debt-to-income ratios may be required to have higher credit scores to qualify for the program.

    Borrower Reserves

    Depending on your credit score, debt-to-income ratio and number of units in the property the HomeStyle Renovation Program may require that borrowers keep a certain level of savings in reserve at the time the mortgage closes. The amount of savings reserve ranges from two-to-twelve months of total monthly housing expense.  There is no reserve requirement for most borrowers financing single unit properties although FREEandCLEAR recommends that you keep enough savings in reserve to cover three-to-six months of total monthly housing expense.  Be sure to check with your lender to understand how the borrower reserve requirements apply to you.

    First-Time and Repeat Home Buyers

    The program is available to both first-time and repeat home buyers.

    Use the FREEandCLEAR Lender Directory to find lenders that offer the HomeStyle Renovation program and other fixer upper loan programs.

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  • Program Costs and Fees
  • Mortgage Rate

    The mortgage rate on a HomeStyle Renovation loan is typically .125% - .500% higher than the rate on a regular mortgage and also higher than the rate for a FHA 203(k) loan.  The mortgage rate is higher because of the additional work and risk associated with home renovation loans.  Borrowers should compare multiple lenders to find the HomeStyle Renovation mortgage with the lowest rate and fees.

    Extra Costs

    Because a HomeStyle Renovation mortgage involves significantly more work and documentation to process and close, borrowers are required to pay extra fees as compared to a regular mortgage. In addition to standard mortgage closing costs, the program requires borrowers to pay a supplemental origination fee to the lender as well as added property inspection, appraisal and title fees.  Borrower are also required to pay architecture, engineering, consulting, licensing and permit fees associated with the home renovation project although many of these costs can be included in the mortgage amount. Please note that due to their added complexity, HomeStyle Renovation loans can take three months or longer to process and close as compared to four-to-six weeks for a traditional mortgage.

    Private Mortgage Insurance (PMI)

    For borrowers with a loan-to-value (LTV) ratio greater than 80%, the program requires that borrowers purchase private mortgage insurance (PMI), which is an ongoing monthly cost in addition to your monthly mortgage payment. In short, PMI protects the lender in the event that the borrower defaults on the mortgage. The amount of PMI the borrower is required to pay depends on the borrower’s credit score and LTV ratio, with the higher the LTV ratio, the higher the required PMI. Unlike the FHA 203(k) Program, the HomeStyle Renovation Program does not require borrowers to pay an upfront mortgage insurance fee and the monthly PMI fee is removed when your LTV ratio falls below 78%.

  • Mortgage Program and Type
  • Mortgage Program

    Fixed rate mortgages and adjustable rate mortgages (ARMs) are eligible for the HomeStyle Renovation program while interest only mortgages are not permitted.

    Mortgage Type

    The program applies to both home purchase loans and refinances although cash-out refinances are not permitted under the program.

    Fannie Mae HomeStyle Energy Program

    The Fannie Mae HomeStyle Energy Mortgage Program enables borrowers to include the cost of energy-efficient home upgrades in their mortgage amount when they buy a home or refinance their existing mortgage.  Borrowers can combine the HomeStyle Renovation and HomeStyle Energy programs to finance energy-efficient improvements that are part of a larger home renovation project.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    HomeStyle Renovation Program Guidelines: https://www.fanniemae.com/content/fact_sheet/homestyle-renovation-overview.pdf

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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