My goal as a Loan Officer is to get the word out and educate everyone on how to buy property and add money into the same loan to do remodeling and updates. One of the least known mortgages out there is called Fannie Mae HomeStyle. I like spreading the word about this loan because it is overlooked and unknown to most Realtors working with buyers. It is unknown almost completely to buyers and owners needing funds to repair and update a home or investment property. I Blog about it often to be sure more people learn about this loan and how it can help you secure funds you may not have to update and improve a property.
If you want to buy a fixer-upper this mortgage may work very well for you. It will allow you to purchase the property (single family, condo, town house, 2 to 4 unit apartment building) and add into the SAME loan the funds to renovate the property, change landscaping, add a fence, add a garage, add an addition, finish a basement, add a hot tub, add a steam shower, remodel a kitchen, update baths, etc.
The way it works is simple. The funds to purchase are added into the size mortgage you have been pre-approved for. It is all one loan, one monthly payment, 30 year term. The down payment is calculated on the sum of the purchase price plus the needed funds to update. Down payment can be as little as 5% of that number for qualifying borrowers.
HomeStyle works well since the amount of work to be done is taken into consideration when the property is appraised. That means credit is given up front while the mortgage is being approved for the rehab work that is to be done after the purchase loan closes. Very few options exist to borrow rehab funds in this way. Not a home equity line of credit or a home improvement loan. Those loans may use the current value of the house to determine if there is any equity to borrow on. HomeStyle uses the “as completed” final value of the house based on the Contractor’s written proposal submitted up front.
The mechanics of the process are straight forward as below:
- Buyer or owner of the property is pre-approved for a specific size mortgage. The funds approved can be divided between purchase price and funds desired to update & repair. (Owners of existing homes can use this loan to secure funds for renovation as well doing it as a HomeStyle refinance.)
- Buyer finds a suitable fixer-upper property and signs a purchase contract.
- Buyer gets a written Contractor proposal for all work to be done within the limits of how much the buyer has been pre-approved to borrow. The proposal defines all tasks to be completed with associated labor and materials costs for each task. The lender will add on an extra 10% of whatever the planned rehab budget is to allow for emergencies or surprise costs that may occur. In this way the homeowner and the lender are protected should additional, unforeseen repairs be required once the project starts up. Also, if need be the buyer or owner may add in up to 6 months of full mortgage payments into the rehab funds should the property not be in safe livable condition during the rehab period. So the homeowner does not have double housing costs during the period of construction prior to moving in.
- A Construction consultant assigned by the lender will review the property and the Contractors written proposal to be sure the project addresses all defects, code violations, structural changes etc., that are planned. If need be corrections will be made.
- An Appraiser assigned by the lender will then appraise the property by reviewing the Contractor’s written proposal. In this way the Appraiser is seeing all the remodeling and changes to be done in order to find appropriate comparable properties to arrive at the final “as completed” valuation. Note that HomeStyle does have a limitation on the rehab fund portion of the loan. There is a cap or limit on the rehab portion equal to 50% of the “as completed” value. This regulation prevents a property from being over improved for the area. An example would be a purchase price of $100,000 with a planned renovation costing a total of $50,000 with an “as completed” value found to be $160,000 – the max rehab loan portion is limited to half that or $80,000.
- Once the Appraisal report is completed with a satisfactory value supporting the planned rehab cost the loan is sent to an Underwriter for final approval and a closing can be scheduled.
- As work progresses the Construction Consultant hired by the lender will inspect the work being done for quality and adherence to the Contractors Plan and sign off on “Draws” or releases of funds out of the rehab portion of the HomeStyle loan. The Draw funds are sent to the homeowner in a two party check payable to both the homeowner and the Contractor. All funds go through the homeowner in this way and never direct to any Contractor.
- When all rehab work is fully completed the Appraiser is sent back to take final photos and assure the lender the construction project is fully complete.
That is how the HomeStyle loan process flows from start to finish at a high level. The process may extend out over 6 months or more for a large rehab project. Or it may be only weeks for a small project. The HomeStyle mortgage is designed to allow most any qualified buyer or homeowner to take on a rehab of a fixer-upper to achieve a successful result. I’m a fan of the various programs showing how people buy and rehab properties. The missing piece rarely shown is how they are financing the costs. I don’t think everyone is paying cash. HomeStyle is a way to finance a fixer-upper. For Top 10 HomeStyle Questions Answered please see https://perryfarella.com/2016/01/top-10-homestyle-rehab-loan-question-answers/ .
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!