With all of the foreclosures, there has definitely been a demand for rehabilitation loans to help homeowners not only purchase but make improvements to the home they are purchasing. The most popular program for this has been the FHA 203K program. However, the FHA 203K programs has limitations not found with Fannie Mae’s HomeStyle Renovation loan. It is available on a negotiated basis and not all lenders have access to this product. The HomeStyle Mortgage offers borrowers of all income levels up to 90 percent financing for the purchase and improvement of a home. Financing is based on the "as-completed" appraised value of the home, and borrowers can use up to 50 percent of that value for improvements or repairs.
Fannie Mae does not specify which improvements a borrower may or may not finance. This means that the improvement funds can be used for "cosmetic" purposes such as carpeting and various kinds of remodeling. There is no minimum amount that needs to be spent on repairs. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
HomeStyle Mortgage: Benefits
- Qualify for loans based on the as-completed value of the property.
- Improve your home at low first mortgage interest rates.
- Do almost any type of improvements or repairs.
- Finance up to six months of mortgage payments to cover non-occupancy costs during construction.
- Lender involvement in construction oversight and monitoring provides added value to borrowers.
- It can be used to purchase and renovate or refinance and renovate an existing property.
HomeStyle Mortgage: Key facts
- This mortgage is available to owner-occupants, purchasers of second homes and investors. The fact that it is available to investors is different than the 203K program.
- Eligible properties are one- to four-unit homes, approved condominiums, coops and PUDs. LTV restrictions may apply.
- Maximum loan amount may not exceed Fannie Mae's conforming loan limits.
- Maximum renovation amount is 50 percent of the as-completed value of the property.
- Qualifying ratios are 28/36.
- Loans are fixed-rate mortgages or rate capped ARMs, fully amortizing with terms between 15 and 30 years.
- A contingency reserve equal to 10 percent of the cost of the renovation is required, and may be financed out of the loan proceeds.
- If the LTV is less than 80%, there is no mortgage insurance like there is for the 203K program.
- FHA 203K loans require a certificate of occupancy (known as a C.O.). This is a nearly impossible request on unfinished new construction foreclosures. This makes FHA 203K loans virtually impossible on unfinished new construction foreclosures. The Homestyle loan only requires homes be “substantially complete”. What does that mean? Well, it is open to interpretation, but anything with the systems in place that is at least 75% complete might be a good candidate for this program.
The Fannie Mae Homestyle program is definitely worth looking into as an alternative to the FHA 203K loan.