A Complete Guide To The Fannie Mae HomeStyle Loans for Renovations

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The Fannie Mae Homestyle Renovation Mortgage is a type of renovation loan or rehab loan. Essentially, the HomeStyle loan – and other products like it – enables home buyers to borrow both the purchase price of the potential home and any renovation costs and wrap it up into one mortgage loan amount.

A Fannie Mae Homestyle Loan is different from a construction loan, which is generally for building an entirely new home. Instead, the HomeStyle Renovation loan is for home buyers who want to buy a fixer-upper or renovate an existing structure and pay the renovation off each month when they pay their monthly mortgage.

Although Rocket Mortgage^® doesn't offer renovation mortgages at this time, we want you to be aware of all of your options and alternatives.

How Does A Fannie Mae HomeStyle Loan Work?

Fannie Mae is not a lender. Instead, Fannie Mae is a government-sponsored enterprise (or GSE) that buys mortgages from banks. This allows banks to get debt off of their books and then use the money to originate more mortgages. This is how banks stay liquid and keep the economy afloat.

But Fannie Mae doesn’t exist just to help out the banks. As a government agency, Fannie Mae exists to help make housing more affordable to mid- to low-income borrowers. Essentially, because they buy up mortgages, Fannie Mae lessens some of the risk to banks so that financial institutions can lend money to “riskier” borrowers – like those with low income or poor credit histories and scores.

The Fannie Mae HomeStyle Loan functions a bit differently than a regular conventional loan. The money is dispersed to pay for the home purchase at closing, but in order to use the funds for renovation, an approved contractor must submit plans to the bank for a “draw” to get paid. Then after inspections to ensure the work is done, the bank sends the money to the contractor. This limits fraud (homeowners and contractors using renovation loans for other things), but it is more of an administrative headache than simply using cash for home improvements.

How Do You Find a Fannie Mae HomeStyle Loan?

Because Fannie Mae doesn’t directly lend money to consumers, borrowers who want to use a HomeStyle loan must first find a lender who offers this type of loan product. Start by contacting your bank, local credit unions or other lenders in your area. Let them know that you’re interested in a HomeStyle loan and, if they don’t offer this type of loan, ask if they can recommend a lender that does.

Rocket Mortgage^® does not currently offer HomeStyle loans.

What Types Of Properties Are Eligible?

The Fannie Mae HomeStyle Renovation loan is incredibly flexible. You can use a HomeStyle loan to buy and renovate pretty much any type of property – including multifamily homes, second homes and investment properties. Below is a full list of the types of properties eligible:

• Single-family detached home
  
  
• Townhome
  
  
• Condo unit/co-op unit
  
  
• Duplex, triplex or quadplex
  
  
• One-unit second home
  
  
• One-unit investment home
  
  
• One-unit manufactured home

Down Payment Requirements

A typical down payment on a HomeStyle loan is similar to the requirements on other Fannie Mae mortgages; you must put down at least 5%, unless you qualify for the HomeReady program, where the down payment is 3%.

If you are buying a multifamily property or some other type of real estate, the down payment requirements increase slightly:

• Second home: 10% (90% LTV)
  
  
• Investment property: 15% to purchase, 25% to refinance
  
  
• Duplex/triplex/quadplex: 5% (or 95% LTV)

The typical down payment amount for a HomeStyle loan will be 3% – 5% of the home purchase price plus the amount you borrow. So, say you’re buying a home for $100,000 and borrowing an additional $100,000 to renovate. The down payment for this home would be 5% of $200,000 or $10,000 dollars.

Also, keep in mind any time you put down less than 20% on a home purchase, you will be required to pay private mortgage insurance (PMI) until you reach 20% equity in the home, which can impact your overall monthly payment.

The primary HomeStyle loan requirement is that you’ll only be able to borrow up to 75% of the home’s after-repair value (ARV) for the renovation portion of the loan.

Using A Fannie Mae Homestyle Loan: An Example

Sadie wants to buy an older home in her parents’ neighborhood with a HomeStyle loan. She is approved by her lender for up to $300,000. An available home in her desired neighborhood costs $220,000, but it is older and needs a lot of work. Even though Sadie’s contractor tells her all of the home projects she wants would cost $100,000, Sadie is only allowed to borrow $80,000 for the renovation because this is the maximum limit offered from her lender based on her income and debts.

What Kind Of Renovations Does A Fannie Mae HomeStyle Loan Cover?

There are many renovations that could increase property value. And the great news is that the Fannie Mae HomeStyle loan doesn’t have m