It’s easier than ever to buy a fixer-upper thanks to home loans like Fannie Mae’s HomeStyle Renovation loan. This mortgage lets you buy a home plus finance repairs and remodeling using a single loan. While a traditional mortgage won’t let you finance more than the home is currently worth, a HomeStyle Renovation loan is based on what the property will be worth after you improve it.

What Is The Fannie Mae HomeStyle Renovation Mortgage?

Fannie Mae’s HomeStyle renovation mortgage is an all-in-one purchase loan and home improvement loan. It’s a great option for buying a property that needs a little—or a lot—of work, whether you’re buying a home to live in full time, part time or as an investment property.

The HomeStyle Renovation loan is super flexible when it comes to the repairs and upgrades you can finance. You can:

  • Gut the house and redo the interior, including the bathrooms and kitchen.
  • Build an accessory dwelling unit—a smaller separate residence—on the property for your mom or dad to live in, or to rent out.
  • Add permanent landscaping features, like trees or a retaining wall.
  • Add luxury features, like an in-ground swimming pool or outdoor kitchen.

In short, you can do just about anything, as long as it will be permanently affixed to the property. And you don’t have to go big: If you just want to finance new floors and new paint, that’s fine.

The property doesn’t even need to be habitable. You can include up to six months’ worth of principal, interest, taxes and insurance in your renovation financing so you can live somewhere else during any major construction work.

What you can’t do with this mortgage is tear down and reconstruct a home. If you want to do that, look into the FHA’s 203(k) loan, which lets you demolish a home down to the foundation and rebuild it.

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How A HomeStyle Renovation Loan Works

If you want to get a HomeStyle Renovation loan, the first step is to find a Fannie Mae-approved lender that offers them. Ideally, you’ll get preapproved with at least three lenders so you can see how much you’re eligible to borrow and who offers the best terms.

Once you know your price point, you can look for homes that you think could be purchased and fixed up for that amount or less. For example, if you’re preapproved to borrow $200,000, you might look for a $125,000 home in a neighborhood where other homes have sold for closer to $200,000. You could then plan to do about $75,000 worth of renovations.

What if you already own a home that you don’t love or that no longer meets your needs? No problem: You also can refinance with a HomeStyle Renovation loan.

Making Your Renovation Plans

In either case, it’s up to you, not your lender, to find qualified, experienced contractors to do the work. You’ll have to oversee the work and get the right insurance, but your lender will have to approve your choice of contractors as well as their plans, specifications and contracts, which must include dates when each project will start and end.

The contractor will need to be on board with Fannie Mae’s requirements for getting paid: They can charge no more than 50% of the materials cost upfront, paid directly by the lender, with the remaining costs paid after the work passes inspection and you submit a draw request to the lender.

An appraiser will review the renovation plans and use this information, along with an appraisal of the property’s current condition, to determine the property’s post-renovation value. When the work is complete, the lender will order a final inspection and reappraisal to make sure the renovations have been carried out as planned. You’ll have 12 months to complete all the work.

HomeStyle Renovation Loan Requirements

HomeStyle Renovation loans have similar requirements to other Fannie Mae conventional mortgages. The only difference is the additional guidelines about how much you can borrow for renovations and what types of expenses can be included in your renovation budget.

Eligible property types

You can use a HomeStyle Renovation loan to buy these types of properties:

  • Single-family detached home
  • Townhome
  • Condo unit
  • Co-op unit
  • Duplex, triplex or quadruplex
  • One-unit second home
  • One-unit investment home
  • One-unit manufactured home

Loan limits

The conventional loan limit in most parts of the country for 2020 is $510,400 for a single-family home and goes up to $981,700 for a four-unit home. The single-family limit maxes out at $765,600 in high-cost areas, and the four-unit limit caps out at $1,472,550.

How much you can actually borrow depends on what your lender says you can afford based on your income and debts, as well as what the home will be worth after renovations.

Here’s how the loan works: You take out a mortgage for the full purchase price minus your down payment. You’ll also receive additional loan proceeds to renovate for up to an additional 75% of what the home is estimated to be worth after renovations.

On a manufactured home, you can borrow up to the lesser of $50,000 or 50% of the “as-completed” appraised value.

Example: Davis wants to buy a foreclosure on a traditional home that’s listed at $100,000, and he wants to make $120,000 worth of improvements to the property. If the appraiser thinks the home will be worth $220,000 after renovations, Davis will be allowed to spend as much as 75% of $220,000, or $165,000, on renovations. The $120,000 worth of renovations he wants to make fall within Fannie Mae’s guidelines.

Costs You Can Finance

You can’t get any cash back when you refinance a HomeStyle loan, but you can include closing costs, fees and prepaid items in your loan. Other things you can finance include labor, materials, architect fees, permits, licenses, contingency reserves, and up to six months worth of mortgage payments for any period when the home is uninhabitable.

The HomeStyle renovation loan even lets you finance the cost of materials for do-it-yourself work on one-unit properties. Up to 10% of the post-renovation value can go toward DIY work, with the lender’s advance approval. If you want to save money on labor by painting the home’s interior yourself, for example, you can finance the cost of paint, drop cloths, brushes, rollers and painter’s tape.

You can’t use the loan to pay yourself for your labor, though, and you’ll have to allocate part of your renovation budget to a contingency fund in case you end up needing to hire someone to finish your work.

If the renovations end up costing less than projected, the extra money can be applied toward your principal balance so you don’t owe as much, or you can make additional improvements.

Interest Rates

Interest rates for HomeStyle Renovation loans are competitive; you won’t automatically pay a higher rate because part of your mortgage will finance home improvements. The usual factors, such as your credit score, debt-to-income ratio, market conditions and loan type will determine your interest rate. You can get a 15- or 30-year fixed-rate loan or adjustable-rate loan.

Down payment and loan-to-value

The down payment requirements (or equity requirements, if you’re refinancing) are the same as with other Fannie Mae loans. You can put down as little as 3% on a single-family home if you qualify for the HomeReady program. Otherwise, you’ll need to put down at least 5%.

The key difference with a HomeStyle Renovation loan down payment is you’re going to be putting down a percentage of the purchase price plus the renovation costs, or a percentage of the home’s post-renovation value, not just a percentage of the purchase price. The down payment is based on how much you’re borrowing, not how much the home is currently worth.

Here are the down payment (LTV) requirements by property type:

  • One-unit home (single-family, condo, co-op, townhome, or manufactured home): 3% or 5% (97% or 95% LTV)
  • Duplex: 15% (85% LTV)
  • Triplex or quadruplex: 25% (75% LTV)
  • Second home: 10% (90% LTV)
  • Investment home: 15% (purchase) (85% LTV), 25% (refinance) (75% LTV)

If you put down less than 20%, you will have to pay for private mortgage insurance until you accumulate 20% equity through paying down your loan and/or home price appreciation.

If you can’t afford any down payment, you might be eligible for the Community Seconds program. Federal, state and local nonprofits, as well as some employers, offer down payment assistance in the form of a small, second mortgage that can cover a down payment of up to 5%.

Credit score and DTI

The minimum credit score for a Fannie Mae loan is 620. Your score can only be this low if you’re buying a one-unit home, putting down at least 25%, your debt-to-income ratio is 36% or less, and you have at least two months of cash reserves.

You’ll have more options, a lower interest rate and an easier time qualifying with a score of 680 to 720 or higher. These are the scores you need if you want to make a lower down payment, have a higher debt-to-income ratio (up to 45%), and have lower cash reserve requirements.

Fannie Mae HomeStyle Renovation Mortgage Advantages

  • Buy a home and borrow money for repairs and upgrades with a single mortgage
  • Renovate your home even if you don’t have much equity
  • Can be used for multi-unit properties as long as you’re living in one unit
  • Can be used for a primary, second or investment homes
  • Generous down payment requirements
  • Likely less expensive than alternatives
  • PMI, if initially required, is cancellable later
  • Use the renovations funds for almost any project you want
  • Generous maximum loan amounts for borrowers who can afford them

Fannie Mae HomeStyle Renovation Mortgage Disadvantages

  • Lender approvals, inspections and fund management create extra hassles compared to paying cash or using a home equity loan for renovations
  • Can’t be used to tear down a home
  • Can’t be used to build a second home on the property
  • Higher credit score requirement compared to FHA 203(k) loan
  • Second homes, manufactured homes and investment homes can only be single-unit properties
  • Can’t be used for improvements that won’t be permanently affixed to the property

Alternatives to a HomeStyle Renovation Loan

A HomeStyle Renovation loan isn’t your only option for fixing up a property. One of these alternatives might be a better fit for your circumstances:

  • Freddie Mac CHOICERenovation loan. Good for performing some of the work yourself and hardening a home against natural disasters.
  • FHA 203(k) loan. Best if your credit score is below 620 or you want to tear a home down to its foundation and rebuild.
  • Home equity loan. A good choice if you want to borrow a lump sum and don’t want the hassle of additional approvals and inspections.
  • Home equity line of credit. Makes sense if you need longer than a year to complete projects and want to borrow smaller amounts as you need them.
  • Cash-out refinance. A solid option if your loan balance plus renovation costs won’t exceed 80% of the home’s value.
  • Personal loan. Could be cheaper in the long run if you get a low rate and pay it off in 10 years or less.
  • Home improvement credit card. Good if it comes with a 0% introductory rate and you can pay off the balance before the rate resets.