HomeStyle Renovation Mortgage Pros and Cons
The HomeStyle Program can be used for major home renovation projects or a total tear-down, making it ideal for the purchase or refinance of a fixer-upper. The HomeStyle Renovation Program is offered by Fannie Mae through participating lenders. From the borrower’s standpoint, the involvement of Fannie Mae is less important because you interact with the lender, not Fannie Mae, when you apply for a HomeStyle Renovation mortgage.
The Program offers borrowers several benefits including financing major home improvements with one mortgage, requiring a low down payment or equity position, financing based on the as-completed property value and the ability to use the program with investment properties. Program negatives include a higher interest rate, extra closing costs and a longer closing schedule as well as loan and renovation project limits.
We review the full list of pros and cons for a HomeStyle Renovation Mortgage below. Borrowers should understand both the positives and negatives of the HomeStyle Program to determine if it is right for them.
HomeStyle Renovation Mortgage Pros
Finance a Home Purchase or Refinance Plus Significant Home Renovations with One Loan
The HomeStyle Renovation Program enables you to finance the purchase of a home or refinance plus the cost of major home renovations with one mortgage as opposed to arranging a mortgage plus a second construction or home equity loan to finance the renovations. Using a single home loan instead of two separate loans streamlines the financing process and saves you money and time. Additionally, most construction loans are not long-term and need to be refinanced when the home renovation project is completed, which increases costs for borrowers. The HomeStyle Renovation Program offers borrowers a simple and more cost-effective solution to finance the purchase or refinance of a property plus major renovations, repairs or remodeling.
Low Down Payment or Equity Position Required
For the purchase of a single unit property with a fixed rate mortgage, the HomeStyle Renovation Program only requires that borrowers make a down payment of 3% of the property purchase price or the case of a refinance, borrowers are only required to have 3% equity in the property, which implies a loan-to-value (LTV) ratio of 97%. The required down payment or equity position of 3% is lower than the 10% - 20% required by other standard mortgage or construction loan programs and the 3.5% down payment required by the FHA 203(k) Home Improvement Loan Program. Keep in mind that for a purchase mortgage, if your LTV ratio is above 95% you are required to be a first-time home buyer or combine the HomeStyle Program with a HomeReady mortgage. For a refinance, if your LTV ratio is above 95%, your existing mortgage must be owned by Fannie Mae. Additionally, the required down payment or equity position is higher for multi-unit properties, investment properties or if you use an adjustable rate mortgage (ARM). For example, the purchase of a three or four unity property requires a down payment of 25%. Requiring a low down payment or equity position for most properties and mortgage programs makes the HomeStyle Program an attractive financing option for borrowers who struggle to save money to buy a home or who have limited home equity.
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Applies to Investment Properties
The HomeStyle Renovation Program applies to both owner-occupied and non-owner occupied properties, unlike the FHA 203(k) Program which only applies to owner-occupied properties. Borrowers can use the HomeStyle Program to purchase rental or investment properties that require significant repairs or rehabilitation. Please note that only single unit investment properties are eligible for the program and borrowers are required to make a much higher down payment on investment properties. Borrowers, however, can use the HomeStyle Program to purchase multi-family properties with up to four units as long as they occupy one of the units.
Financing Based on Post-Renovation Property Value
In most cases lenders do not provide a mortgage based on the after renovation value of a property which means that borrowers qualify for a smaller mortgage and are required to arrange a separate loan to finance the home improvement project. Only after the project has been completed can borrowers refinance their mortgage and separate loan based on the higher, post-renovation property value. The HomeStyle Renovation Program, however, allows you to qualify for a mortgage based on the post-renovation property value. For the purpose of qualifying for the HomeStyle Program, the property value is defined as the property purchase price plus the estimated cost of the renovations or the appraised as-completed property value, which is less. Using the higher post-renovation property value enables borrowers to qualify for a larger mortgage and also eliminates the need to arrange a separate construction or home equity loan.
No Restrictions on Mortgage Type or Loan Program
While the HomeStyle Renovation Program is typically used to buy homes that require significant renovations borrowers can also use the program to refinance their existing mortgage and finance a major home improvement project at the same time. Borrowers with high mortgage balances and limited equity in their homes may find it challenging to qualify for a construction loan, HELOC or home equity loan to finance a home improvement project. Borrowers, however, can use a HomeStyle Renovation Mortgage to both refinance their existing mortgage and finance their home renovation. Additionally, borrowers can use either a fixed rate mortgage or an adjustable rate mortgage (ARM) with the HomeStyle Renovation Program. Although the down payment or equity position required for an ARM is higher than for a fixed rate mortgage, the ability to use multiple loan programs increases your financing flexibility.
No FHA Mortgage Insurance Premium
Unlike the FHA 203(k) Program, the HomeStyle Renovation Program does not require borrowers to pay an upfront mortgage insurance fee. Additionally, borrowers that make a down payment of at least 20% are not required to pay ongoing monthly private mortgage insurance (PMI). Borrowers that make a down payment of less than 20%, however, are required to pay PMI, which is an extra monthly cost on top of your mortgage payment. Depending on your credit score, LTV ratio and mortgage program, monthly PMI may be less than monthly FHA mortgage insurance premium (MIP). Additionally, PMI is removed when your LTV ratio falls below 78% whereas borrowers are required to pay FHA MIP over the entirety of their mortgage.
HomeStyle Renovation Mortgage Cons
Higher Interest Rate
The interest rate for a HomeStyle Renovation loan is usually .125% - .375% higher than the interest rate on an FHA 203(k) loan or other conventional mortgage program. Additionally, borrowers with lower credit scores and higher debt-to-income ratios usually pay higher interest rates with the program. The HomeStyle Loan Program is offered by traditional lenders such as banks, mortgage brokers, mortgage banks and credit unions so borrowers should compare proposals from multiple lenders to find the mortgage with the lowest rate and fees.
Higher Closing Costs and Longer Closing Timeline
The HomeStyle Program requires borrowers to submit to the lender plans and specifications for the home renovation project. Preparing these plans can be costly and time-consuming. Additionally, due to the additional work required to review and process a HomeStyle mortgage, most lenders charge an extra fee which increases your closing costs. Some appraisers may also charge higher fees because they are required to appraise the property both before and after the home renovation project is completed. Additionally, because of the complexity involved, it can take more than three months to process and close a HomeStyle loan as compare to one-to-two months for a regular mortgage. Borrowers should understand the extra cost and time associated with a HomeStyle Mortgage before selecting a lender.
Mortgage and Renovation Budget Limits
The HomeStyle Renovation program limits the size of loan you can obtain through the program. The HomeStyle Program uses the conforming loan limit, which is $726,200 for a single unit property in the contiguous United States. In Alaska and Hawaii the conforming loan limit is $1,089,300 for a single unit property. People who live in more expensive areas of the country may find that the loan limits reduce their housing options. Additionally, please note that for a home purchase loan, the maximum value of the renovations is the lower of 75% of the as-completed appraised property value or the property purchase price plus the total renovation costs. For example, if the as-completed value of the property is $400,000, you can borrow up to $300,000 for renovations and remodeling. For a refinance, the total renovation cost is limited to 75% of the as-completed property value. For a manufactured home, the value of the renovations is the lower of 50% of the as-completed property value or $50,000. The limit on renovations could restrict the amount of work you can do to improve a property.
No Sweat Equity
Unlike the FHA 203(k) Loan Program, the HomeStyle Renovation Program does not permit home owners to be reimbursed for the labor or sweat equity they contribute to a renovation project from the loan proceeds. Home owners can be reimbursed for any supplies or materials they purchase for the project but they cannot receive any cash proceeds from the loan.
More FREEandCLEAR Resources
HomeStyle Renovation Mortgage Program Overview
Review our comprehensive overview of the HomeStyle Renovation Mortgage Program including borrower qualification requirements and other key program information such as property eligibility and home improvement project guidelines.
Mortgage Rates
HomeStyle Renovation loans are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our rate tables to contact lenders in your area to determine if they offer the HomeStyle Renovation Program and to view updated mortgage rates and fees. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Best Fixer-Upper and Home Renovation Mortgage Programs
Review and compare important program features and eligibility requirements for multiple fixer-upper and home renovation mortgage programs so that you can select the mortgage option that is right for you.
Sources
"HomeStyle Renovation." Mortgage Products. Fannie Mae, 2020. Web.