Fallen in love with a fixer-upper?
You can take out a renovation loan — also called a rehab loan — to turn a dump into your dream home. While you have a few options for renovation loans, HomeStyle loans rank among the best.
But rehabbing an old home adds another set of wrinkles to the homebuying or refinancing process, and maybe to your forehead too. Make sure you know exactly what you’re getting yourself into before making an offer.
What Is a HomeStyle Renovation Loan?
The HomeStyle loan program lets homebuyers or existing homeowners borrow the money for a renovation project. Government-sponsored enterprise Fannie Mae issues the guidelines for the loan, because they end up buying these loans on the secondary market. You borrow the loan from your local bank or lender, and they sell it to Fannie Mae.
That lets you finance rehab costs without having to take out a second mortgage or home equity line of credit (HELOC), or bury yourself in credit card debt.
HomeStyle loans are designed for renovating existing buildings, not building new ones. If you want to design and build a new home, you need a construction loan. And a good sense of humor, or a bottomless supply of bourbon, or both, because construction projects never go as smoothly as you expect.
How HomeStyle Renovation Loans Work
Like other conventional loans, you apply with a local mortgage broker, lender, bank, or credit union. The combined loan amount, including purchase and renovation costs, can’t exceed 75% of the after-repair value (ARV) of the property.
At closing, the lender issues part of the loan, to help you cover the purchase price or pay off your old loan if you’re refinancing. They hold back the renovation costs however, held in reserve or “escrow.”
As you complete the repairs, the lender gradually reimburses you for them. You work out a draw schedule, detailing the various phases of your renovation project, and how much the bank will reimburse you for each phase. For example, Phase 1 might include updating the plumbing, Phase 2 updating the kitchen and bathroom fixtures, and Phase 3 replacing the flooring. After each phase, the bank reimburses you as a draw on your escrowed funds.
The bank sends out an appraiser to verify the quality and status of the work before releasing your draws. You must complete the renovations within 12 months of borrowing the loan.
HomeStyle Loan Eligibility & Requirements
You can take out a HomeStyle loan to either purchase a new home or refinance your existing home. Eligible properties include detached single-family homes and townhouses, multifamily properties with up to four units, condominiums, and co-ops.
You can also borrow against manufactured homes, but Fannie Mae caps the loan-to-value ratio at 50% of the ARV.
You can even take out a HomeStyle loan for second homes and investment properties. But Fannie Mae only allows single-unit properties for these, not multifamily properties.
The maximum loan-to-value ratio (LTV) that you can borrow varies. For single-unit primary residences, you can borrow up to 97% of the after-repair value if you qualify for Fannie Mae’s HomeReady program. Otherwise, plan on putting down at least 5% if you’re buying, and leaving at least 5% equity in your home if refinancing.
For two-unit homes, you must put down at least 15%, and 25% for three- or four-unit properties. Second homes require at least a 10% down payment. Investment properties require at least 15% down for purchases, or leaving 25% equity in the property for refinances.
Regardless of the type of home, you’ll need to pay for private mortgage insurance (PMI) if you borrow more than 80% of the ARV. You’ll continue paying PMI until your loan balance drops below 80% of your home’s value.
Fannie Mae allows a debt-to-income ratio up to 45%, although they prefer no more than 36%.
Finally, HomeStyle loans are subject to the same loan limits as other conforming loans. Most conforming loans have a ceiling of $647,200 in 2022, although in some areas with a high cost of living you can borrow as much as $970,800. Read more about Fannie Mae loan limits here.
Pros & Cons of HomeStyle Loans
Like every other loan program, HomeStyle mortgages come with their fair share of pros and cons.
Pros of HomeStyle Loans
HomeStyle loans come with plenty of financial perks and other benefits. Consider the following advantages as you explore rehab loan options.
- Low Down Payment. Borrowers with strong credit can put down as little as 3%.
- Lower Interest Rates Than Alternatives. You can borrow money for less than the interest on HELOCs, home equity loans, personal loans, credit cards, and other ways to pay for home renovations.
- One Loan for Buying & Renovating. Rather than having to take out two separate loans, you can cover both the purchase (or refinance) and the renovation in a single loan. That saves you money not just on interest but also on closing costs.
- Flexible Property Types. HomeStyle loans allow most types of primary residence including condos and manufactured homes, plus second homes and investment properties.
Cons of HomeStyle Loans
No product is perfect, and that includes loan programs. Make sure you understand these downsides before taking out a HomeStyle loan.
- Designed for Decent Credit. Conventional mortgages work best for people with strong, or at least decent, credit. That typically means scores in the mid-600s at the very least, although you can technically get a HomeStyle loan with a score of 620. If the dings on your credit report look more like bullet holes, expect a rockier time getting approved.
- Slower Loan Processing. The home buying and mortgage approval process are fraught enough without adding in extra complications like renovations, approved contractors, draw schedules, and the like. Your loan file might get bogged down in the underwriting process and need constant nagging on your part to keep slogging it forward.
- Licensing & Approval Requirements. You must typically use licensed contractors approved under the loan program, and possibly even an architect. While Fannie Mae does allow up to 10% of the completed value to reimburse you for DIY work, it’s not what the program is designed for, so that can slow down your loan approval even more.
- Not Ever Lender Offers It. Some lenders don’t offer HomeStyle loans, so you’ll need to call around to find a lender that does.
Should You Get a Fannie Mae HomeStyle Renovation Loan?
If you have strong credit and like the idea of buying a fixer-upper or renovating your house, then HomeStyle loans work like charm.
Of course, not everyone wants to hassle with renovations, contractors, draw schedules, inspections, permits, and the like. As someone who used to renovate investment properties, I can tell you firsthand just how much of a pain in the rear these projects can cause.
For buyers and homeowners with weaker credit, those who’d rather DIY without inspections or permits, and those who might qualify for alternatives like the VA renovation loan, HomeStyle loans might not be the best fit.
Alternatives to a HomeStyle Loan
As outlined above, you can always take out a second mortgage or HELOC to cover the renovation costs. With these options, you don’t have to restart your entire mortgage’s amortization from scratch. In the case of HELOCs, you get a revolving line of credit you can tap into repeatedly. As a new homebuyer, either option gives you some breathing room before they tackle a renovation.
You could take out a cash-out refinance, which avoids the scrutiny and draw schedule, but it still involves shelling out for closing costs and restarting your mortgage from Square One.
Alternatively, you can draw on credit cards or take out a personal loan. You avoid closing costs, unlike HELOCs or second mortgages, but you’ll probably have higher interest rates. Consider these options if you can pay off the balances quickly, or if you want to DIY the work or use unlicensed workers instead of licensed contractors.
Nor is HomeStyle the only rehab mortgage in town. Freddie Mac offers a competing program called CHOICERenovation, and military veterans can take advantage of VA renovation loans. The latter is a benefit of military service, and usually beats out market-based alternatives like Fannie Mae and Freddie Mac loans.
The Federal Housing Administration (FHA) has its own rehab mortgage program, called 203(k) loans. Like all FHA loans, they’re more lenient on credit scores, but they require you to pay the mortgage insurance premium (MIP) for the entire life of the loan.
HomeStyle Renovation Mortgage FAQs
Mortgage loans are complicated. And renovation loans are more complicated than most.
You probably have questions about them. These are some of the most common.
What Home Improvements Does a HomeStyle Loan Cover?
You can use a HomeStyle loan for virtually any home improvement project. But it does have to, you know, improve the value of the house, as confirmed by an appraiser.
Example renovations include home updates like new kitchens or bathrooms, new flooring, painting, new mechanical systems such as HVAC or electrical, and structural updates like a new roof or foundation repairs. You can use HomeStyle loans for home additions or to add an accessory dwelling unit for house hacking, such as a carriage house, garage apartment, or basement apartment.
You can even use HomeStyle loans for luxury additions such as a swimming pool or hot tub, but again, the appraiser has to sign off on it actually improving the property value. Pools often don’t do that.
What Are the Interest Rates for HomeStyle Loans?
Surprise! They’re actually no different from other Fannie Mae loan programs. Expect to pay similar mortgage rates to other conventional loans.
Can You DIY the Work, or Do You Need to Hire a Pro?
Technically, the HomeStyle program allows you to pay yourself up to 10% of the after-repair appraised value for DIY repairs. But that doesn’t mean the lender won’t put you under the microscope if you volunteer to do some of the work yourself.
Your work will be held to the same quality standards as professional contractors, so if you don’t have experience renovating houses, leave it to the pros.
Oh, and one last note about DIY: HomeStyle loans only allow it for one-unit, owner-occupied properties.
For the typical homeowner looking to make upgrades to a fixer-upper and hire licensed contractors by the book, HomeStyle loans make an affordable and convenient option.
If you don’t meet the minimum credit score, you probably want to look into alternatives like the FHA 203(k) loan. Read more on how to buy a house with bad credit if you worry about your credit history.
No matter what rehab mortgage you take out though, you’ll need enough cash for closing costs, the down payment, and the first draw’s worth of renovation funds upfront. So while you can save money overall by overhauling a fixer-upper, you probably need more cash saved up, making it a mixed blessing for first-time home buyers.