Know Your Renovation Loans: A Complete Guide To The Fannie Mae HomeStyle Loan
Lauren Bowling7-minute read
November 09, 2021
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The Fannie Mae Homestyle Renovation Mortgage is a type of renovation loan, or renovation mortgage. (You might also hear the term “rehab loan.” Don’t worry – it’s just industry jargon and it all means the same thing!) 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 renovate an existing structure and pay the renovation off each month when they pay their monthly mortgage.
How Does A Fannie Mae HomeStyle Loan Work?
Fannie Mae is not a lender. Instead, Fannie Mae is a government sponsored enterprise 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 serves 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 thin credit.
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” in order 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 I 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.
Please note: 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
- Condo unit/Co-op unit
- Duplex, triplex or quadruplex
- One-unit second home
- One-unit investment home
- One-unit manufactured home
Down Payment And Loan To Value 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: 15% (or 85% LTV)
- Triplex/quadplex: 25% (or 75% 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 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 homes’ after renovation 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 parent’s neighborhood. 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 the property value. And the great news is that the Fannie Mae HomeStyle loan doesn’t provide too many restrictions on what the renovation funds can’t be used for so long as it is permanent to the home and provides value. From small projects like paint and floors to large scale rehabs or additions, you can use a HomeStyle loan for just about anything so long as repairs are completed within twelve months of the loan origination.
Projects such as:
- New floors
- A second, smaller home on the property
- New landscaping
- Kitchen remodel
- Bathroom remodel
- Mechanical upgrades and improvements (such as upgrading electrical or HVAC)
HomeStyle loans can also be used to build accessory units, like a carriage house or garage apartment or to finish a basement for an in-law suite.
What Is Not Covered By A Fannie Mae HomesStyle Loan?
Actually, the only thing you really can’t do with a HomeStyle loan is demolish the existing home and rebuild. (Or, if you are rehabbing a manufactured home, you can’t make any structural changes to over 50% of property.) Here are a few other examples of what is not covered by the Fannie Mae HomeStyle loan:
- Tearing down a home
- Building a second home on a new property
- Improvements that are not permanent to the property like furniture, certain types of landscaping, light fixtures, or a moveable storage shed or unit
What Costs Does A Fannie Mae HomeStyle Loan Cover?
In addition to purchasing the property and paying for the project, you can also “roll” many other types of constructions costs into your HomeStyle loan, such as:
- Living costs for a rental while the home is being renovated
- Up to 10% of ARV can be used for building materials for DIY work
- Closing costs
- Permits and license fees
- Project contingency reserves
What Credit Score Will I Need For A Fannie Mae HomeStyle Loan?
Credit score requirements for a HomeStyle loan are exactly the same as for other Fannie Mae loans, including a conventional mortgage loan: you’ll need a minimum score of 620 and a debt-to-income ratio of less than 50% in order to qualify.
Also, there are no income limits on the Fannie Mae HomeStyle loan, but there are caps on how much you can borrow. These aren’t specific to the HomeStyle loan, but they are the 2021 loan limits for all conforming loans that follow Fannie Mae and Freddie Mac guidelines:
- For a single-family home, borrowers can take a loan amount up to $548,250.
- In high-cost metro areas, the mortgage limit is $822,375 for a single-family home.
- For a multifamily property, borrowers can borrow up to $685,400 for a four-unit property, or up to $1.5 million in a high-cost area.
Fannie Mae HomeStyle Loan Interest Rates
There is a myth that exists with renovation loans: that because you are rolling both rehab costs in with the mortgage the interest rate will be higher, but this simply isn’t true. In fact, the only reason you’d pay more for interest is because you are potentially borrowing more to complete the renovation. Often, the HomeStyle loan comes at a lower interest rate mirroring those of conventional loans, rather than the slightly higher interest rates associated with HELOCs and home equity lines of credit.
It is also possible to secure a Fannie Mae HomeStyle loan for a property one already owns by refinancing from your existing loan to the HomeStyle loan product. This would be beneficial for those who want to renovate their home, but lack the cash reserves to do so.
In order to get the lowest interest rate possible, it is best to pre-qualify with at least three lenders and compare the rates against one another.
Fannie Mae HomeStyle Loan Alternatives
As stated before, there are a handful of other loan products of this type. While the Fannie Mae HomeStyle loan is popular for its flexibility, there are other times when another loan product may be more beneficial.
FHA 203(k) Loan
The Federal Housing Administration is another government agency that serves to act in the best interest of the American consumer. The big difference between the FHA 203(k) loan and the Fannie Mae HomeStyle loan is that with the FHA 203(k) product, you can demolish an existing structure, provided you rebuild the home back on the existing foundation.
With any type of renovation loan, you are using bank money for the rehab, so they are the ones who oversee the project and payment. The borrower never receives cash upfront with this type of loan.
Home Equity Loans
Preferable when homeowners need cash for home repair projects, but do not want to go through the hassle of bank approval of contractor plans, cash draws and inspections.
Home Equity Lines of Credit (HELOCs) are better for small projects done over time. With a HomeStyle loan, all work must be completed within a year, so if this timeline doesn’t work for you and your family, it may be better to use home equity.
Preferable when your loan balance and the repairs won’t cost more than 80% of your home’s value and you don’t want the hassle of having the bank in the middle of your home renovation project.
The Bottom Line
The Fannie Mae HomeStyle loan is a conventional mortgage option for those who want to finance renovation costs at a low interest rate. With the average age of a single family home nearing 40 years old, more and more homeowners will need to renovate in order to maintain a property and live comfortably.
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