Fannie Mae HomeStyle Loan – What is it and How Does it Work?

Have you ever wanted to buy a fixer-upper that had great potential but was in terrible shape? Were you forced to pass it up because you didn’t have the cash to fix it up, and most mortgage programs wouldn’t approve a home in its current condition? Perhaps, you’ve considered renovating your current home since there seems to be no good options on the market?

The Fannie Mae HomeStyle Renovation loan solves these problems. HomeStyle Renovation loans offer financing for renovations alongside the purchase of a new home or refinance of an existing home.

How Does it Work?

Both the renovating and purchase funds will be under one combined loan with one mortgage payment each month. If the home won’t be livable until the renovations are complete, you can include up to six months of principal, interest, taxes, and insurance in your loan, to make temporary housing arrangements more affordable.

In 2022, you can borrow up to 95% of the home’s ‘after repaired value’ as determined by an appraiser who will review the renovations you’ll do. 2022 conventional loan amounts are limited to $647,200.

You must use approved contractors to complete the renovations. While you can pick the contractors, they must meet specific guidelines set by the lender. You cannot complete the renovations yourself under this program.

All renovations must be completed within 9 months of the loan closing.

What Renovations can you Do?

You can use the funds set aside for the renovations on almost any repairs or upgrades if they will be a permanent part of the property such as painting the house, new flooring, or remodeling the bathroom. You can add room additions, gut the kitchen, or even add an in-ground pool. A complete teardown and rebuild are prohibited along with self-help (DIY) repairs.

How to Qualify for the Fannie Mae HomeStyle Loan

To qualify for the Fannie Mae HomeStyle loan, you must meet standard conventional financing requirements. Basic requirements include:

  • At least a 620-credit score
  • At least a 5% down payment
  • A debt-to-income ratio of 45% or less
  • Stable income and employment for the last 2 years
  • No recent bankruptcies or foreclosures
  • Renovation plans/specs must be provided to quantify costs of materials and labor

Down Payment Requirements

It’s important to understand the different down payment requirements for the Fannie Mae HomeStyle loan. The typical borrower will put down 5% of the purchase price for a primary residence, single-family unit such as a house, condo, or townhome. If you’re buying a second home, investment, or multi-unit property, the down payment requirements increase.

  • Primary Residence, Single-Family Unit -5% down
  • Primary Residence, Multi-Unit, 2 Units- 15% down
  • Primary Residence, Multi-Unit, 3-4 Units- 25% down
  • Second Home, Single-Family Unit- 10% down
  • Investment, Single-Family Unit- 15% down (purchase)
  • Investment, Single-Family Unit- 25% down (refinance)

Property Qualifications

In addition to qualifying for the loan financially, lenders have guidelines pertaining to the property too. Like standard conforming loans, though, the requirements are quite relaxed compared to other loan programs.

Here are the requirements the property must meet.

  • It must have year-round access from the street
  • The home must be considered real estate by the local zoning regulations
  • The home must have adequate utilities as is the norm for the area

If the home doesn’t meet all of these (except the zoning requirements), you can use the loan proceeds to bring the home up to the property requirements, however, you must be able to prove this to the lender.

All other requirements for the loan proceeds regarding the home renovations are relaxed. You can use the funds however you want to renovate the home as long as the home meets the above requirements first.

Contractor Qualifications

Because you’re using the funds to renovate your home, the lender also has a say in the contractors you use. While you can pick the contractors, they must meet specific guidelines.

Because the contractor is a big part of the process, the HomeStyle guidelines don’t let you do the renovations yourself. All contractors must be licensed and insured as well as prove they have the time and finances to complete the project within the 9-month timeline.

The contractors must also prove they have the experience and knowledge necessary to complete the job you have. There is an approval process by which contractors can be approved to perform renovations as a part of the HomeStyle Renovation loan program.

While you don’t have to use a contractor that’s already used the Fannie Mae HomeStyle program, it is to your benefit to do so. Here’s why.

Contractors are under a strict deadline. They must adhere to the contracted dates they agreed to when you signed up to work with them. They must also be willing to accept the disbursement agreement the lender offers based on the work to be done (they don’t get all the funds upfront). Working with a contractor that’s already been through the process makes it much easier.

Other Options for Home Renovation Loans

The Fannie Mae HomeStyle loan isn’t the only option you have to renovate your home. Here are a few other options.

Cash Out Refinance

A cash out refinance can be used to pull equity out of your home up to 80% loan to value (single family residence) or 75% for a 2-4 unit primary residence. If you have significant equity in your home, you could use this method to “cash out” some of that equity to use for renovations. For example, if your single-family home is worth $400,000 and you owe $100,000, you have another $220,000 that could be borrowed making your new combined mortgage balance $320,000.

Home equity loans have fixed interest rates and terms of 30, 25, 20, or 15 years. You make principal and interest payments from the start and receive the funds in one lump sum at closing.

Home Equity Line of Credit (HELOC)

A HELOC is a line of credit against your home’s equity. You get a credit line, much like a credit card, that you can use up to your limit. You’ll pay interest on any funds you withdraw, but not the full amount of the line. You aren’t required to make principal payments, but if you do, you can reuse the funds during the draw period which is 10 years. After 10 years, the loan goes into the repayment phase where you make principal and interest payments and can no longer withdraw from the line of credit.

Final Thoughts

The Fannie Mae HomeStyle loan is a great way to buy a home and have the funds to renovate it without worrying about multiple loans. You can borrow the funds to do just about any renovations that are permanently affixed to the home, including adding a swimming pool.

The qualifying requirements are simple, and you’ll only pay mortgage insurance until you owe less than 78% of the home’s value. You can put down as little as 5% of the home’s after-repaired value or invest more if you want instant equity in the home.

There are many ways to afford the renovations a home needs, but the HomeStyle loan offers some of the most competitive rates, the simplest guidelines, and a streamlined way to enjoy a newly renovated home without the complication of multiple closings, fees, or loans.

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