Fannie Mae HomeStyle Loan: Buy and Renovate Your Property with One Mortgage
The Fannie Mae HomeStyle® renovation loan lets you buy and renovate a property, using a single mortgage. This loan program provides a convenient way for many borrowers to finance home improvements, but comes with more requirements than a traditional mortgage. Here’s what you need to know before deciding whether the HomeStyle renovation loan is right for you.
How does a Fannie Mae HomeStyle loan work?
The Fannie Mae HomeStyle loan is a mortgage loan that allows borrowers to purchase a home and finance the cost of qualifying renovations, all in one loan. However, the money for repairs isn’t just given to you in one lump-sum payment at the closing table. Instead, you and your mortgage lender will typically follow this step-by-step process:
1. Determine your total mortgage amount: This amount includes the home’s purchase price and the cost of any planned renovations. You and your lender will use plans for the work involved and contractor bids to come up with this number.
2. Buy the existing property: Your mortgage lender will transfer the funds to the seller for the property purchase at closing.
3. Transfer any remaining funds to an escrow account: The escrow amount includes the funds needed to make the repairs, contingency funding and an allowance for mortgage payments that may come due if you’re unable to live in the home while the work is being completed.
4. Release periodic installment payments: Your lender will release these payments, known as “draws,” from the escrow account as specific phases of work are completed.
5. Start making mortgage payments: Once the work is completed and you’re able to live in the home, you’ll start making mortgage payments on the full amount you’ve borrowed.
Since the GSEs are willing to buy loans that meet their minimum mortgage requirements, lenders face less risk of having to keep bad debt on their books. As a result, they’re often willing to offer loan products with more lenient eligibility requirements, such as the Fannie Mae HomeStyle loan.
How do you take out a Fannie Mae HomeStyle loan?
Since Fannie Mae isn’t a lender, you can’t borrow from the entity directly. If you want to use a HomeStyle renovation loan to finance the work needed on your fixer-upper, you’ll need to find a lender who offers this loan product.
Start by calling local banks, credit unions and mortgage lenders to ask what products they offer. If one financial institution doesn’t offer the HomeStyle renovation loan, they may be able to recommend another that does.
Mortgage tip: Shop around
Don’t forget to shop around to secure the best mortgage interest rate. Borrowers who compare offers from different lenders can potentially save more than $76,000 over the lifetime of their home loan, according to LendingTree data.
After you’ve found a lender that suits your needs, the basic process for getting a HomeStyle loan is the same as getting any other type of loan: You’ll need to apply for a home loan and meet basic income, credit and qualifying guidelines (more on that below).
Fannie Mae HomeStyle renovation loan requirements
Credit score and debt-to-income ratios
You’ll need at least a 620 credit score for a Fannie Mae HomeStyle loan, while the maximum debt-to-income (DTI) ratio is 45%. These requirements are more stringent than the 580 score required for the government-backed FHA 203(k) program.
That said, if your credit score barely makes the cut, be prepared to make a much larger down payment — as much as 25%. If you want to make a smaller down payment, you’ll need at least a 700 credit score.
Additionally, to be considered for the lowest possible rate on a HomeStyle loan, you’ll need a 780 credit score or higher.
Acceptable property types
You can renovate a one- to four-unit primary home, condo, co-op, planned unit development (PUD) or manufactured home. An important heads-up: You can’t borrow as much for renovations on a manufactured home, and renovations on second or vacation homes and investment properties are limited to one-unit properties.
Down payment
The table below reflects how much of a down payment you’ll need for a HomeStyle renovation loan, based on the property type you’re financing and whether you plan to live in the home full time.
| Property type | Occupancy | Down payment/equity requirement |
|---|---|---|
| One-unit | Primary | 3% |
| Two-unit | Primary | 5% |
| Three- and four-unit | Primary | 5% |
| One-unit | Second home | 10% |
| Manufactured home | Primary | 5% |
| Manufactured home | Second home | 10% |
| One-unit | Investment property | 15% (25% for refinance) |
Appraised value
HomeStyle renovation loans require a home appraisal. Your mortgage lender relies on the appraisal report to ensure they’re not lending you more money than your home is worth.
One major perk of the HomeStyle loan is that your loan amount is based on your home’s “as-completed” value, which is an estimate of what the property will be worth once the renovations are complete. This gives you more borrowing power than a traditional mortgage loan, where the appraisal is always based on the “as-is” home value before any planned improvements take place.
Project timeline
Renovations must be completed within 15 months from the date your loan closes.
What kind of improvements does the HomeStyle renovation loan cover?
There are very few limitations on the size and scope of remodeling projects you can complete with a HomeStyle loan. This is in stark contrast to the FHA 203(k) loan program, a government-backed renovation loan that doesn’t allow for luxury improvements like swimming pools or outdoor fireplaces.
The table below provides some examples of projects you can and can’t finance with the HomeStyle loan:
| Examples of renovations you can make with a Fannie Mae HomeStyle loan |
|---|
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| Examples of renovations you can't make with a Fannie Mae HomeStyle loan |
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What costs can be rolled into your loan amount?
Aside from the costs of buying the property and the renovations themselves, the HomeStyle renovation loan lets you finance a few other costs associated with making home improvements, including:
- Property inspection fees
- Architectural and engineering fees
- Consultant’s fees
- Permit costs
- Up to six months’ worth of mortgage payments, if you can’t live in the home during the renovations
Financing these costs can help lessen their financial burden by allowing you to pay for them over time instead of upfront. You’ll be expected to pay interest on any amount that you borrow, however, which can make renovating more expensive.
Pros and cons of a Fannie Mae HomeStyle renovation loan
| Pros | Cons |
|---|---|
| Convenience. You can buy and renovate a home with the same loan. Higher loan amounts. Your loan amount is based on your home's estimated value after the renovations are complete. Fewer restrictions. You can make a wide array of improvements with very few limitations. | Higher mortgage payment. Your monthly payment will be higher for your entire loan term because of the added renovation costs. More legwork. You'll need additional approvals for your project and the contractors involved. Stricter qualifying requirements. You have to meet higher qualifying requirements than the government-backed renovation programs, like the FHA 203(k) loan. |
Fannie Mae HomeStyle loan alternatives
If you don’t need all the bells and whistles of the Fannie Mae HomeStyle loan, or if you don’t qualify, here’s a list of other home improvement loans to consider.
- Cash-out refinance. You can borrow more than you currently owe on your existing mortgage and pocket the cash difference with a cash-out refinance for home improvements.
- Home equity loan or home equity line of credit (HELOC). You can convert a portion of your home’s equity to cash with a home equity loan or a HELOC. A home equity loan is a lump-sum loan with a fixed interest rate, while a HELOC works more like a variable-rate credit card.
- Personal loan. A personal loan doesn’t use your home as collateral, so you won’t risk losing it to foreclosure if you can’t repay the loan. However, you’ll typically pay higher interest rates and have shorter repayment term options than HELOCs and home equity loans.
- Credit card. Using a credit card may be worth it for smaller “pay-as-you-go” projects, especially if you find one with a 0% APR for an introductory period. Credit cards often have higher interest rates than other financial products, so be sure you track the “interest-free” period to avoid getting stuck with high interest charges.
- FHA 203(k) loan. The Federal Housing Administration insures FHA 203(k) loans with lower credit score requirements than conventional loans. Like the HomeStyle loan, you can roll the cost of repairs and the purchase price into a single loan.