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What is a HomeStyle Renovation Loan, and Is It Right for Me?

If you’re dreaming of a fixer-upper that you can update to suit your style, you should definitely look into a renovation loan. But is it the right kind of mortgage for your current situation? That depends on a few factors. Let’s explore the pros and cons to see if this style of financing could work for you. 

The basics

There are two main styles of renovation loans — the Fannie Mae HomeStyle Renovation Mortgage, and an FHA 203(k) loan.

Guaranteed by the government, the Federal Housing Authority loan will help you finance the purchase and renovation of your primary residence, not an investment property. It’s a marvelous opportunity for first-time home buyers who are willing to put in the work and able to deal with living in a construction zone for a little while. There’s also a refinance option for current homeowners. 

Because the terms of these loans allow you to go as far as tearing down an existing structure to the foundation and then rebuilding it completely, borrowers who are using this type of financing must hire a licensed HUD consultant to oversee the renovation process. If you’re interested in applying for an FHA 203(k) mortgage, I can help.

Fannie Mae HomeStyle Renovation Mortgages give prospective homeowners a lot more flexibility, although the loan does not cover a full demolition. This kind of renovation mortgage has many advantages, and it works for fully residential, vacation, and investment properties. Here are just a few of the upgrades and repairs you can finance with one of these products:

  • Completely redoing the interior, including bathrooms and kitchens
  • Building a mother-in-law residence or other accessory dwelling unit
  • Adding permanent landscaping features such as fencing, trees, or retaining walls
  • Installing a swimming pool or other outdoor recreation areas
  • Green and sustainable projects, such as enhancing energy efficiency

Another great aspect of the Fannie Mae renovation loan is that the property doesn’t have to be habitable while your construction team is doing the work. According to Forbes, you can include up to six months of principal, interest, taxes, and insurance premiums into the loan so you can live elsewhere during this time frame. 

For top mortgage lenders, products like this HomeStyle Renovation Loan helps them meet a much wider range of client needs. In a competitive housing market like the current Chicagoland environment, this kind of mortgage helps revitalize historic neighborhoods and gives families a chance to purchase a more affordable home and adapt it to their specific needs.

Fannie Mae also offers current owners a chance to refinance their current mortgage to a HomeStyle loan so they can afford to upgrade and perform much-needed repair work. The median age of American family homes is about 40 years, so it’s crucial to maintain our aging housing stock and bring these dwellings up to modern standards. 

Additionally, more people than ever are living in multi-generational homes. The HomeStyle loan allows property owners to create customized living spaces for beloved elderly relatives and exuberant children, as well as adding features like another bathroom, a home office, or mobility device accessibility.

Your next steps

If this kind of mortgage seems like the right fit for your family, it’s time to get your financial documents in order and get in touch with me to understand the cost and the process in more detail. I’ll work with you to prepare a pre-approval letter, which will let you know how much you’ve been approved to borrow. In a highly competitive market, most sellers won’t even enter into negotiations unless you can prove you’ll have the funds.

Finding the ideal home for renovation in your preferred area might be a bit tricky at first, so it’s important to have an experienced real estate professional on your side who can help you source the right property.

HomeStyle Renovation loans can be used for: 

  • Single-family homes
  • Condominium units
  • Cooperatives 
  • Townhomes
  • Duplexes, triplexes, or quad-plexes
  • Your second or vacation home
  • Manufactured homes

It will be up to you to find licensed and experienced contractors to do the work, and the underwriter will usually want to approve their plans and contracts, which have to include a hard start and end date for every project. 

Your contractor will also have to be amenable to Fannie Mae’s disbursement structure — they can only ask for a max of 50% of the materials cost up front, and the remaining costs are paid after the work is completed and passes inspection. 

Talk to your homeowner’s insurance provider as well. Making upgrades and renovations could leave you underinsured if your coverage doesn’t factor those improvements into the value of your home. Your policy may require you to inform your insurer of any alterations to your house, so it’s best to cover all contingencies. Adding a “dwelling under renovation” rider will protect you from financial loss if there’s theft of materials or other accidents during the construction period.

The bottom line

Fannie Mae HomeStyle Renovation Mortgages have many advantages, especially for homebuyers who want to save a historic residence, make improvements on a multi-family dwelling for additional rental income, or add extra room for your children or extended family.

Ideally, your credit score is 680 or higher, and you have a low debt-to-income ratio. What kind of property you’re buying and the total value of your loan will determine how much you need to have for a down payment. Generally, the minimum would be 5%, or 3% (of the future value of the home) if you also qualify for Fannie Mae’s HomeReady program
If you’re dreaming of buying a fixer-upper that you can customize for your specific needs, a renovation loan could be the perfect solution. With over 16 years of experience in the Chicago real estate industry, I’m ready to help you every step of the way toward making your dream a reality. Give me a call today!


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