This type of financing requires a down payment of just 3% if you're buying a single-family home with a fixed-rate mortgage.
You'll have 12 months to complete the work, and there's no minimum amount you must devote to repairs. You can use the money for repairs, remodeling, renovations or energy improvements.
The only restriction is that the changes must be permanently affixed to the property and add value.
The lender will oversee the renovations to make sure they get completed. The lender will need copies of your plans and specifications as well as your renovation contract.
Since you can put down as little as 3%, the most you can borrow on the home is 97% of the lesser of:
Renovation costs include not just labor and materials but also property inspection, architectural and engineering, and permit and licensing fees, plus an optional 10% contingency reserve.
With a HomeStyle loan, the total cost of the work can be as much as 75% of what the property is expected to appraise for once the work is complete, but the mortgage amount still must fall within the above guidelines.
Suppose you want to purchase a home that costs $190,000. The appraiser looks at your plans, scope of work and comps, and determines the property's after-renovation value to be $250,000.
Fannie Mae says you can borrow up to 50% of that, or $125,000, for repairs.
The purchase price of $190,000 plus $125,000 for repairs, equals $315,000. Subtract your 5% down payment, and you can theoretically borrow $299,250. However, in this case, the cost basis of $315,000 is higher than the after-renovation value of $250,000, and you can only borrow based on the lower of the two.
So with 5% down, the most you could borrow would be $237,500. Subtracting the $190,000 purchase price, you'd need to limit your repair costs to $47,500.
HomeStyle loans are also subject to the usual conventional mortgage limits, which are $484,350 for one-unit, single-family homes in most areas, up to $726,525 in high-cost areas.
With less than 20% down, you'll also have to pay private mortgage insurance or PMI, which is based on the as-completed value, not the purchase price.
One final advantage is that HomeStyle loans are available to investors with a 15% down payment. Investors cannot take out 203(k) mortgages.
Investors will often max out multiple credit cards or take out hard money loans, both with double-digit interest rates, to finance flips. The HomeStyle loan offers a cheaper alternative.
Common features of home renovation loans
Before the appraisal, you'll need to draw up a budget based on contractors' estimates for your proposed scope of work.
The appraiser will use this information to estimate an after-improved value for the home you want to buy, which determines how much you can borrow.
You'll be able to choose your own contractor, but the lender will have to approve it, so pick someone who is qualified, licensed and bonded.
HomeStyle and 203(k) loans allow for the possibility of some DIY work, but you can't borrow money to pay yourself for your labor.
Loan fees, such as the origination fee and the appraisal fee, may be higher since renovation loans are more complex than a typical mortgage. For the same reason, closing may take 60 to 90 days instead of the typical 30 to 45 days.
Fannie Mae HomeStyle loans let you skip up to six monthly payments if you can't occupy the home during renovations, with the interest for those months added to the principal of the loan.
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