Fannie Mae’s HomeStyle® Renovation Mortgage

The Loan-to-Value (LTV) ratio is based on the “as-completed” value, which is an appraiser’s estimate of the home’s worth after all renovations are finished. For purchase transactions, the LTV is determined by dividing the loan amount by the lesser of the “as-completed” appraised value or the sum of the purchase price plus total renovation costs. For refinance transactions, the LTV is calculated by dividing the loan amount by the “as-completed” appraised value. This methodology allows borrowers to borrow against the future equity created by the improvements.

Lenders generally require that all renovation work be performed by a licensed, bonded, and insured contractor. The borrower is responsible for hiring the contractor, but the lender must verify the professional’s credentials and experience to ensure they are qualified for the project. A written renovation contract detailing the specific work and agreed-upon costs is required. While the lender oversees the administrative aspects, such as managing draws from the escrow account, the borrower retains the primary responsibility for selecting a contractor who can execute the plans effectively and compliant with local codes.

The HomeStyle® Renovation program mandates that all renovation work must be completed within 15 months from the closing date. Lenders are required to monitor the progress of the construction to ensure it remains on schedule. If the work is not completed within this timeframe, it constitutes a significant issue that may require the lender to take specific remedies or repurchase the loan. Therefore, it is critical for borrowers to select reliable contractors who can commit to finishing the project within this strict 15-month window.

Renovation projects frequently encounter unforeseen issues or cost overruns once work begins. To mitigate this risk, lenders typically require a contingency reserve fund. This reserve generally amounts to 10% to 15% of the total renovation budget. It ensures that funds are available to cover unexpected repairs or deficiencies discovered during the construction process. If the renovation is completed without depleting these funds, the remaining balance is not lost; instead, it is applied to reduce the outstanding principal balance of the mortgage loan.

If the planned renovations are extensive enough to render the home uninhabitable, the HomeStyle® Renovation mortgage offers a solution to ease your financial burden. You can finance up to six months of principal, interest, taxes, and insurance (PITI) payments into the loan amount. These funds are held in an escrow account and used to pay the mortgage on your behalf while the work is being completed. This prevents you from having to make mortgage payments on the property while simultaneously paying for temporary housing elsewhere.

Fannie Mae offers a “Do It Yourself” (DIY) option, but it comes with strict limitations. This option is available only for one-unit properties and is not permitted for manufactured homes. Under the DIY provision, the cost of the work cannot exceed 10% of the “as-completed” value of the property. Furthermore, borrowers can only be reimbursed for the cost of materials and properly documented contract labor; they cannot compensate themselves for their own labor or “sweat equity.” The lender must review the proposed work in advance and inspect completion for items costing more than $5,000.

Yes, there is a cap on the total cost of renovations you can finance. generally, for purchase and refinance transactions, the cost of renovations cannot exceed 75% of the “as-completed” appraised value of the property (or the sum of the purchase price plus renovation costs, whichever is lesser). For manufactured homes, the limit is more restrictive: renovation costs cannot exceed the lesser of $50,000 or 50% of the “as-completed” appraised value. These limits ensure that the investment in repairs is proportional to the final value of the home.

Yes, one of the distinct advantages of the HomeStyle® Renovation mortgage is its eligibility for investment properties. While many renovation loans are restricted to owner-occupied homes, this program allows investors to purchase or refinance single-unit investment properties. This feature enables investors to acquire distressed properties, fund the necessary repairs, and hold them as rentals using a single loan. Additionally, the program is available for second homes (vacation properties), provided they are one-unit dwellings. Standard underwriting requirements regarding credit scores and down payments apply to these transaction types.

Unlike some government-backed programs that restrict luxury improvements, the HomeStyle® Renovation mortgage permits a wide array of renovations. Borrowers can finance almost any improvement that is permanently affixed to the property and adds value. This includes structural repairs, modernizing kitchens and bathrooms, and even luxury additions like swimming pools or outdoor recreation areas. The primary restriction is that the program cannot be used to completely tear down and reconstruct a dwelling. Energy-related improvements are also eligible and may qualify the borrower for a partial credit on loan-level price adjustments.

The HomeStyle® Renovation mortgage is a versatile single-close loan that allows borrowers to purchase a home that needs repairs or refinance an existing property while including the funds for renovation in the loan balance. This consolidates the purchase price (or existing balance) and the improvement costs into one mortgage with a single monthly payment, eliminating the need for a second mortgage or personal loan. It is designed to be flexible, covering various property types, including principal residences, second homes, and investment properties, making it a valuable tool for both homebuyers and real estate investors.