Today’s competitive seller’s market makes buyers fight for a chance at a limited inventory of houses. However, for buyers that can see a “diamond in the rough,” there is an incredible opportunity to create a dream home scenario. We’re talking dream homes with open layouts, modern fixtures, curb appeal, and hidden potential all rolled into one! Plus, it isn’t just about renovating a house to make it look better. There is also the ability to buy a house that is flying under the radar of other buyers. Buyer can put their own taste into these homes and possibly have instant equity. Sounds great, but what if buyers can’t pay cash for the purchase and renovations? That is where the Fannie Mae Homestyle Renovation loan comes in. The most versatile mortgage for remodeling a home.
Not only does the Homestyle renovation finance primary residences. It will also finance the purchase price and renovations for second homes or rental properties, but it also has features that allow improvements that could improve about every aspect of a property.
HomeStyle Renovation Loan Advantages
First, in order to understand the differences between our renovation products, we have included an informative chart below. Although, there are a few huge advantages we want to point out in more detail. As mentioned, this is the only product providing renovation options for secondary or investment homes. Unlike FHA, the Homestyle Renovation loan’s monthly mortgage insurance could go away once the balance is paid under 80% of initial value. The FHA 203k requires 10% down in order for mortgage insurance to go away, but only after 11 years.
Furthermore, borrowers with stronger credit scores could save as much as half of the monthly insurance premium compared to FHA. Finally, conventional renovation loans like this do not charge an up-front funding fee like FHA 203k loans do. That’s a savings of 1.75% of the loan amount! Basically, home buyers with strong credit scores have several areas of payment and closing cost savings compared to FHA.
Larger Renovation Projects
Also, notice that this Fannie Mae renovation option allows for a complete teardown or rebuild. Quite the solution in the case of fire, flooding, or just the desire to totally change the home’s look. Room additions such as adding a master suite, bathroom, or garage are very popular. This is especially true with older homes which typically have smaller rooms and fewer bathrooms. All of these and more are possible. Furthermore, if you find a house with structural issues, you will find lenders shy away from the unknown underlying issues. Although, structural repairs completed by a qualified contractor are allowed through a HomeStyle Renovation.
One caveat of Homestyle financing is that the renovation amount may not exceed 75% of the final, after improved value. Typically, FHA loan limits are lower than conventional loan limits, so again Homestyle wins in this area. This Fannie renovation product follows conventional and high balance limits for each county. Thus, it is at least the minimum $453,100 loan size or more.
If we are talking about major home improvements, it is possible that the home may not be habitable for a while. In some cases, these renovation loans will allow up to six months payments to be included in the loan. That can provide a huge boost to a buyer’s budget through the transition. Let’s say the buyer has good enough credit and income but lacks down payment. The Homestyle Renovation loan also allows the buyer to use gift funds for down payment. Finally, the last one we want to expand on is mold remediation. Mold is prevalent in many areas and can cause serious health problems. Therefore, using this product (as well as FHA 203k) to correct and repair mold in the home is a great feature. It not only protects the structure of the house, but also the health of the household.
Buying a Second Home With a HomeStyle Renovation Loan
As you will see in other OVM articles, we offer several renovation loans. These include VA Renovation, FHA 203k Limited, FHA 203k Standard, and the FNMA HomeStyle Renovation we are discussing. One of the biggest ways Homestyle Reno stands out is that it allows for the purchase or refinance of a second home, where a buyer can create their own oasis for vacations. One of our more recent scenarios included a home buyer purchasing a property but wanted an inground pool. Follow the scenario below.
Second Home Renovation Success Story – Swimming Pool Financing!
Recently, a client found a home to buy in the Outer Banks, NC. The primary goal was to make this a vacation home where they could enjoy the beach life. There were other goals as well. Goals included little money down as possible, completing some renovations, and installing an in-ground swimming pool. In order to pull this off, the buyers needed to find the best way to finance this dream vacation spot.
Option one included using a standard conventional mortgage to purchase the home. Afterward, the buyer could access investment funds for the home improvements and the pool installation. Next, is the same conventional mortgage to purchase the home, then obtaining financing directly through the pool company. The third option was purchasing the home, then opening an equity line to finance the renovations and pool. Finally, the last option was the Homestyle Renovation Loan option. It offered one loan to combine the purchase, renovations, and swimming pool purchase and installation. Additionally, the conventional renovation loan required only 10% of the total price + improvements amount!
The buyer had a big decision to make and consulted their CPA. Option one is the more traditional route with the conventional loan and paying cash for the improvements, but, that comes with a tax bill. Cashing in some investments creates a taxable event. Option 2 didn’t need as much of the investments and therefore a smaller tax bill, but the pool financing company had a much higher interest rate and shorter loan terms, which created an additional, much higher payment. Option 3, with the HELOC, had higher rates, shorter terms, and therefore a higher payment. In the end, a Homestyle Renovation loan was the winner and here is why:
- One loan with a fixed interest rate
- Only 10% down based on the price + total improvements
- Avoided higher interest rate and payment of pool financing company
- Avoided income tax bill from investments withdrawal
- Work could be performed after closing
Buying a Rental Property With a HomeStyle Renovation Loan
Investors have realized that buying a vacation rental or long term rental can be a huge step towards financial freedom. Although, with a limited housing supply and increased buyer competition, it is tougher to buy investment property. But, what if an investor has a purchase renovation loan available to buy a distressed or rundown property? This could create so many positive outcomes such as:
- Instant equity
- Increased rents
- Preserve cash
- Extend property life
- More marketable home
- Better tenant experience
- Longer term or repeat tenants
Maybe you’re considering the world of investment properties. Imagine being able to make bids on distressed properties in “as is” condition. This could provide a huge advantage over a small pool of buyers. With rising home prices often exceeding the comfort level of first time home buyers, these prospective buyers are deciding to rent. Therefore, it creates a great situation for a landlord with renovated properties. Worried about qualifying for an investment property? In addition to the buyer’s income, we can add the new properties rent to help qualify. Basically, 75% of the property’s market rent as determined by the appraiser is added to the buyer’s income.
Some investors have a contractor on call for handyman jobs or they are savvy enough to do the work themselves. A key point to remember is that none of the renovation loans allow DIY projects. The work must be completed by a contractor.
Your Fannie Mae HomeStyle Renovation Loan Lender
Now, think about everything we have mentioned and even the items in the chart that were not. Imagine how many buyers pass up homes because they have mold, damaged pool, only 1 bathroom, foundation issues, and more. Like we said before, with some imagination, a great contractor, and an experienced renovation loan officer, you too can obtain your own “diamond in the rough!”
The OVM Financial Renovation Department has over 35 years of experience in renovation lending. Renovation loans are what they live and breath all day long.
“Renovation loans are our focus and our only job, so we are the best at handling these loans. Some loan officers close one or two renovation loans a year at best. Not us! Our reno department is renovation all day, every day!” Cola Galvin, VP Renovation Lending
Download Our Renovation Comparison Chart
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