The question is asked, what other loans are there for repairs to a home or renovation besides an FHA 203K or as an alternative to FHA 203K? Is there a rehab loan for investment rental property? Is there a rehab loan for a vacation home ? Is there a renovation refinance mortgage loan other than 203K?
Many buyers and homeowners have heard of the FHA 203K renovation loan. They may know that an owner occupied home or multi-unit apartment building up to 4 apartments can be purchased with an FHA 203K loan and money can be added to the mortgage to remodel the property. Realtors may also have heard of the 203K. But there is another renovation loan choice that not many people are aware of called Fannie Mae Homestyle Renovation. This is a conventional or non-FHA insured loan for both home buyers and home owners needing funds to rehab or remodel a property. A Homestyle renovation loan can be used to both purchase a property or refinance a property already owned. Even better the property can be a primary residence or a second home or a one unit INVESTMENT rental property. Here a major difference with FHA 203K in that a Homestyle renovation mortgage loan can be used to buy or refinance a primary residence, a vacation home (second) or an investment rental one unit ( house, condo, townhouse) property. Homestyle provides more options on property type than FHA 203k which is limited to owners who will live in the property.
With Homestyle the costs of renovations will be based on the plans and specifications for the rehab work and on the contractor’s bids for all of the work planned by the borrower. The Homestyle renovation loan will include a contingency or emergency reserve equal to 10% or 15% of the total costs of the repairs and renovation work. This reserve must be established and funded for all mortgages to cover required unforeseen repairs or deficiencies that are discovered during the renovation. Or basically an emergency. An example of this might be a bathroom remodel where, when the walls are taken down to the studs it is found that the old waste pipe is corroded and leaking so now must be replaced with a modern waste pipe conforming to local building codes. If this pipe replacement was not budgeted in the plans for the work then this extra cost can funded out of the reserve. It is always wise to have a renovation reserve and that’s why they are a requirement of Homestyle. In my experience I can almost guarantee there will be an unforeseen expense in rehabbing an old property.
The contingency reserve may be financed into the loan or paid separately by the borrower. Unused contingency funds, unless received directly from the borrower, must be used to reduce the outstanding balance of the renovation mortgage after all of the renovation work has been completed. Excess funds, if any, after renovations are completed, may be applied to the loan balance as a curtailment or may be reimbursed to the borrower for the cost of actual supplies or additional renovations for which paid receipts are provided. An example of this would be if new kitchen appliances were not in the budget and at the end of the project the borrower bought them and wishes to be reimbursed from any unused funds.
A little known aspect of a Homestyle Renovation loan is that during the time the property cannot be occupied in a major renovation and the borrower or owner must live elsewhere, it is possible to borrow additional funds in this mortgage to pay for up to six (6) months of mortgage payments, property tax escrow, insurance escrow and even any private mortgage insurance. This aspect of Homestyle can be very helpful in that many people may not be able to both make the payments during renovation and also pay to rent another space to live temporarily until the home is able to be occupied.
Renovation-related costs that may be considered as part of the total renovation costs in addition to labor and materials include:
Property inspection fees;
Costs and fees for the title update;
Architectural and engineering fees;
Independent consultant fees;
Costs for required permits; and
Other documented charges, such as fees for energy reports, appraisals, review of renovation plans, and fees charged for processing renovation draws.
Homestyle has no required improvements or restrictions on the types of repairs allowed or a minimum dollar amount for the repairs. Repairs or improvements, however, must be permanently affixed to the real property and add value to the property. The message here is that a home owner can do almost anything provided it is a permanent part of the house that stays with the house when using a Homestyle renovation loan. Certainly local building codes will come into play on health, safety and sanitation issues when doing renovations with Homestyle. Generally it would be helpful to renovate in ways that add as much value to the completed house as possible. An example would be another bathroom or two. Or a larger kitchen with space for people to gather and state of the art appliances. Recently I have seen that local utility companies are offering rebates for energy efficient improvements like 95% efficient furnaces, 90% efficient hot water tanks or tankless hot water heaters which save space and energy compared to hot water tanks among other items. Below is website by state showing local utility rebates as well as Federal, state and municipal tax advantages that I think is excellent for discovering what options may be available to you: http://www.dsireusa.org/
With Homestyle there is a maximum amount of repairs or improvements subject to 50% of the after improved appraised value. This is key and a huge advantage of Homestyle. This means that the cost of repairs and related items financed into the loan cannot be more than 50% of the future value of the property when all work is finished. What this illustrates is that there usually is an increase in property value with most any renovation and Homestyle uses the future renovated value of the property as a basis for the amount of the renovation funds, not what the property is worth today or purchased for today.
An example might be a home purchased for $100,000. The borrower uses Homestyle to add $50,000 worth of rehab funds into the transaction. But the future as renovated completed value will be $200,000 for the house when it’s done. Here 50% of the as completed value is: .50 X $200,000 = $100,000 which is within Homestyle guidelines of the renovation funds not being more than half of the final value of the house or in this example the renovation funds could not be more than $100,000 and are not, renovation funds are just $50,000.
Another example may be a homeowner wishing to use Homestyle as a refinance loan to borrow renovation funds and pay off the current mortgage to replace it with the Homestyle mortgage.
Lets say this owner currently has a $200,000 mortgage on the house from its purchase 5 years ago. The owner wishes to build an extension onto the house involving adding 2 more bathrooms and 2 more bedrooms for example among other items like a 95% efficient furnace etc. The total funds needed for renovation are $100,000.
So the new Homestyle refinance mortgage must be for the sum of the current loan to be replaced of $200,000 + $100,000 in renovation funds for a total of $300,000 on the Homestyle refinance mortgage. It is projected that the future as completed value of the house when done will be $450,000. This valuation is done by an appraiser who views the house and the contractor renovation plans. Homestyle guidelines are that the renovation funds part of the refinance mortgage cannot be for more than 50% of the future as completed value.
In this case that is : .50 X $450,000 = $225,000. So the home owner is fine to have the renovation piece of HomeStyle mortgage equal to $100,000.
The home owner is also fine to have the refinance piece of the existing mortgage be for $200,000. In this way Homestyle can be used as a refinance renovation mortgage.
I hope this has been helpful and I’m always happy to answer questions. My email is firstname.lastname@example.org.
Below is a website that will show the Fannie Mae loan limits for each property type and for special high cost areas so you can see what the loan limit for a Fannie Mae Homestyle loan would be for your property type and location.
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!