Game Changer - A Conventional Renovation Loan Product

What is a HomeStyle Renovation Mortgage?

The Homestyle Renovation Mortgage allows borrowers to include financing for home improvements in a purchase or refinancing transaction on an existing home.  It includes the necessary funds needed for the renovation into the loan balance. The loan amount is based on the as completed value of the home rather than the present value.

Benefits for Borrowers

Cost Effective way to renovate or improve a home

Single mortgage means lower closing costs and typically lower interest rate on a first mortgage

Borrowers can qualify for CLTV (Combined Loan to Value) up to 105% with eligible Community Seconds subordinate financing

Loan amount based on “As-Completed” value of the home or the cost basis, whichever is less.

Lender Requirements (Not all Lenders can do this Program)

Special Approval is required through Fannie Mae

Two years of direct experience originating and servicing renovation mortgages in the past 5 years

Net worth must cover your obligations as the lender during renovation period

Strong Operational Controls and strong financial capacity to cover lender’s recourse obligations during renovation period

Check with your lender first to see if they meet all of the above criteria

What is the Lender’s Role?

Ensure that the contractor the borrower has chosen is adequately qualified and experienced for the work being performed (Use Fannie Mae for 1202)

Set up custodial account for renovation funds. Renovation plans & documents must be reviewed to ensure that they are reasonable, accurate and complete.

Confirm that required insurance is in place. Includes Hazard insurance, Title Insurance and Mortgage Insurance when required.

Obtain an appraisal based on the reviewed “plans and specifications” for the renovation. (“As completed” value). This is needed to determine Loan amount.

Disburse funds during the renovation based on completed work and lender inspections. At each draw you must determine that no other liens and either title update or endorsements.

Ensure title is clear of all liens and encumbrances (see above)

Disburse remaining funds and interest to the borrower when the renovation is complete. Keep in mind, remaining funds cannot be simply given to the borrower, instead the lender has two options to properly disburse these funds.

Reducing unpaid balance – known as UPB (the outstanding principal balance)

Making additional Improvements or repairs to the property that are permanently affixed and add value

The lender maintains full recourse during the renovation phase meaning the lender has the legal right to demand compensation or payment.

The HomeStyle Loan Process

The lender must review plans and manage renovation funds

This loan type has three phases:

Loan Prep

Renovation

Work Complete

Loan Prep Phase: The borrower works with contractor, who submits work plans and specifications to the lender. The borrower usually submits these plans to the lender. An appraiser then reviews these plans and specifications, and determines an “as completed” value after improvements. This is used to calculate the loan amount. The Lender uses Maximum Mortgage Worksheet (Form 1035) to determine mortgage amount

Renovation: Loan is closed and sold to Fannie Mae. Funds for renovation are placed in custodial account. During these phase the work is completed and funds are drawn as needed. As the contractor works, he or she requests funds. Before the lender can fund the work an inspection must be done to ensure that the work is properly completed, and gets lien waivers and title endorsements. Once that is done, the lender can issue fund draw requests with two party checks or direct funding drawn from the custodial account.

Work Complete: Once the work is completely finished the final inspection takes place. The Title policy is updated and the completion certificate (Form 1036) is issued. The Lender provides signed Completion Certificate to Fannie Mae to have the recourse removed.

Eligibility and Underwriting Guidelines 

Borrowers:

Individual Home Buyers or homeowners,

For-profit and non-profit investors

Government Agencies

NOTE: (Non-Profit borrowers have special requirements and must provide documentation of their track record in raising funds, background information on board members, copy of their 501c3 status, IRS Form 990, By-Laws, and The Purpose & Resolution from the board of directors.)

Properties:

Occupancy Type:

1-4 Owner Occupied

1 Unit Second Home

1 Unit investor Properties

Property Type

New or existing properties

Condos, co-ops, and PUDS that meet Selling Guide Requirements

No Manufactured Housing allowed

Loan Products:

FRM Fixed 15 year and 30 year terms

ARM (Adjustable) 3/1, 5/1, 7/1, 10/1 terms

Loan Purpose:

Purchase and limited cash out refinance

Cash-out refinance is not allowed

Underwriting:

DU: Approve/Eligible recommendations

Manual: eligibility requirements apply

Mortgage Insurance:

Standard MI coverage applies

Must cover as completed value

Must be in affect at closing

Subordinate Financing:

With eligible Community Seconds, CLTV (Combined Loan to Value) can be 105%

Subject to pricing adjustment

 REFER TO FANNIE MAE’S ELIGABILITY MATRIX FOR CO-OPS AND SECOND HOMES, AS WELL AS REQUIREMENTS FOR MANUAL UNDERWRITING

https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

Eligible Renovations

Renovations Must:

Be permanently affixed to the property

Add value to the property

Fannie Mae does not specify improvements or repairs as long as the two above criteria are met

Examples:

Kitchen Renovation

Bathroom Renovation

Room Addition

Contractor Requirements

Renovation must be completed by a registered, licensed, and reputable general contractor

General Contractor must submit itemized plans and specifications

Itemized plans and specifications should describe work, time frame, and detailed cost breakdown

Appraiser should estimate “As- Completed” value of a home after renovations, based on a review of plans, and specifications

Do it Yourself Work (Some Lenders do not allow)

Has special requirements

Financing is 10% of the “As Completed” Value of the home (vs 50% if you use a professional)

1- Unit , owner occupied ONLY

Material costs are reimbursed however labor cost is not

Borrower must provide itemized bills or receipts for materials

The lender must inspect the completion of all repair items that cost more than $5000

Maximum Purchase Money Amount

Renovation costs can be up to 50% of the “As- Completed” Value (add up the costs) or Do It Yourself Work is only 10% maximum

Labor and Materials

Soft Costs (fees, permits, licenses)

10% Contingency reserves (used to cover unplanned expenses during renovation)

Mandatory for 2-4 unit properties

Optional for 1 unit, owner occupied properties

Monthly PITI payments (up to 6 months) if borrower has to vacate the property

“Sweat Equity” cannot be added to renovation costs

LTV (Loan to Value) is based on the lessor of:

“As-Completed “Appraisal value OR

Purchase price + Renovation cost

Use Form 1035

Homestyle Renovation Maximum Mortgage Worksheet

Calculate the maximum mortgage amount available

Determining a Limited Cash Out Refinance

Renovation costs can be up to 50% of the “As- Completed” Value (add up the costs) or Do It Yourself Work is only 10% maximum

Labor and Materials

Soft Costs (fees, permits, licenses)

10% Contingency reserves (used to cover unplanned expenses during renovation)

Mandatory for 2-4 unit properties

Optional for 1 unit, owner occupied properties

Monthly PITI payments (up to 6 months) if borrower has to vacate the property

“Sweat Equity” cannot be added to renovation costs

LTV is determined by:

Loan amount divided by “As- Completed” Appraised Value

Use form 1035

Documents needed with the Homestyle Mortgage

Fannie Mae will purchase the loan when delivery is complete and documents have been received

Mortgage Note

Assignment to Mortgage to Fannie Mae

Construction Documents and Addendums

Form 3734 and 3735

Lenders Manage Renovation Funds

Funding the work:

Renovation and Contingency funds must be placed in an interest bearing custodial account

The custodial account – which is an escrow account – must meet the FDIC or NCUA standards. Funds for different borrowers may be intermixed in the escrow account

All interest from the account must be paid to the borrower

Any excess renovation funds must be used to wither pay down the principal balance or used for additional renovation costs. 

When the Renovation is Complete:

The borrower and contractor sign a Completion Certificate (Form 1036)

Lenders obtain evidence of title insurance through completion date showing Homestyle Renovation Mortgage in a first lien position

Any remaining funds can be used to pay down principal balance or used for additional renovation improvements

Appraiser preforms final inspection

Resource: www.fanniemae.com