I wanted to write a short post on the new conventional renovation mortgage by Freddie Mac called CHOICERenovation. In the past I have written about another conventional renovation loan called HomeStyle by Fannie Mae. This new loan by Freddie Mac has differences I will highlight as well as general guidelines.
Being a Loan Officer who focuses on all types of renovation financing options I’m happy to see a new financing solution being added. I have read stories written about the amount of homes in most areas of the country over 30 years old that need updating to current technology and styles of living. This underscores the demand for renovation loans that Freddie Mac is seeking to fulfill by entering this market of aging homes needing modern updates.
- CHOICERenovation can be used by Buyers at purchase time to combine the full cost of repairs and updates into one loan with one payment. Home owners seeking funds to update or expand their current home or a vaction home are eligible also. It can also be used by Investors seeking to purchase a single unit property to lease and add needed rehab dollars in one loan.
- CHOICERenovation is a first lien mortgage product. It is one loan with one closing unlike a new build construction loan that may have two closings or a home improvement loan for a shorter repayment period and possibly higher interest rate or a home equity line of credit limited to current value of the home prior to any improvements.
- CHOICERenovation can be done with a 30 year term with fixed rate or a 15 year term with fixed rate. The mortgage uses the After Renovated Value (ARV) rather than current value for loan approval. Using ARV allows borrowers to have the benefit of the future improved value for loan approval now, prior to any construction completed. The renovation dollar portion of the loan can be for up to 75% of ARV. As an example, if purchasing for $100,000 and adding $50,000 for renovation with an ARV projected by an Appraiser to be $175,000 then the renovation dollar portion can be as much as $131,250 or 75% of $175,000. If buying with 5% down, that is calculated off the sum of purchase price of $100,000 plus rehab dollars of $50,000 totaling $150,000 X .05 = $7500.00 for down payment.
Below are key features of CHOICERenovation:
- Finance up to 95% of the purchase and rehab costs on owner occupied 1 unit property
- First time Buyers can finance up to 97% of the purchase and rehab costs on 1 unit property
- 1 to 4 unit owner occupied properties eligible as below-
- 1 unit 5% down payment – finance 95% of the purchase and rehab costs
- 2 unit 15% down payment – finance 85% of the purchase and rehab costs
- 3 & 4 unit 20% down payment – finance 80% of the purchase and rehab costs
- A Significant difference over Fannie Mae HomeStyle on 3 and 4 units in that HomeStyle limits financing to 75% of ARV on 3 and 4 unit properties
- 1 unit vacation or second home 10% down payment – finance 90% of the purchase and rehab costs
- 1 unit Investment properties 15% down payment – finance 85% of the purchase and rehab costs which includes warrantable condos, single family or townhouses
- The loan will add a 10% to 20% Contingency Reserve to the rehab budget to allow for unexpected costs that may arise during rehab, but if never used, can be subtracted from the loan size at completion or used for extra items not originally planned
- If needed, an amount up to 6 months of payments of principal, interest, taxes and insurance can be added, so that during the rehab period, when the property cannot be occupied or generate income, monthly payments are made from the loan rehab funds to avoid the burden of double housing costs for borrowers living elsewhere during rehab
- Rehab funds can be used to make any home safe, secure, sanitary and sound to live in again including repairing mold, water or fire damage, new mechanical systems, new interior or exterior, etc. and for protecting the property in case of future disaster with storm barriers, foundation retrofitting for earthquakes, retaining walls, etc.
- Loan funds can pay for costs of Architect plans, building Permits, Draw inspections, etc.
- All renovation must be completed within 180 days
I have seen many borrowers, who as first time Buyers, have found a home, condo, townhouse or 2 to 4 unit property to purchase and rehab. CHOICERenovation is another option to do so with the down payments above.
What is unique about CHOICERenovation is a 3 or 4 unit property can be mortgaged to 80% of value. This opens the door for a home owner of a 3 or 4 unit to secure a refinance mortgage to update or repair a property which generally may then allow rents to be higher than previously, before rehab.
For example, a home owner of a 4 unit apartment building, who lives in one unit and rents the others now for $1000 a month due to outdated condition and has an exisiting mortgage of $250,000 can benefit. The first step is determining the rehab budget from a General Contractor, say it is to be $400,000. The CHOICERenovation loan will be large enough to pay off the current mortgage of $250,000 then add in the $400,000 for total rehab. That is a total new loan of $650,000. An Apprasier then judges the ARV to be $812,500 when completed. This size mortgage represents 80% of the after renovated value ($812,500 X .80 = $650,000). That makes the rehab possible, knowing the future finished value or ARV up front. In addition the Appraiser projects future rents for each of the renovated apartments to be $1500.00 a month, a gain of $500.00 for each of the 3 leased, renovated, apartments.
So you can see how this might work very well for a home owner or Buyer of a 4 unit property needing updates. At todays generally low interest rates the cost may be about $5 a month in payment for each one thousand dollars borrowed on a 30 year term mortgage. A $650,000 mortgage may have a principal & interest payment of about $3103.00 (Interest rate @ 4% on 30 year term with APR @ 4.152%). If rents from 3 leased apartments are $1500.00 each after rehab, that’s $4500.00 in gross rents. The owner then lives in the 4th apartment, rehabbed as well, at possibly very little personal cost depending on property tax and insurance costs.
Another example of how CHOICERenovation can be helpful is for an Investor purchasing a 1 unit single family home or condo to renovate and lease to a tenant. Here the down payment is 15% of the sum of purchase price plus rehab dollars. Lets say the house costs $150,000 needing $75,000 in renovation to repair all damage, add new mechanicals, etc. for a $225,000 transaction. The down payment is .15 X $225,000 = $33,750. Lets assume ARV will be $250,000. Using the 75% max rehab portion rule, the rehab dollar portion of the loan can be up to $187,500 so no problem there. Let’s assume Appraiser has projected future after renovated rent can be $2500.00. In CHOICERenovation on investment property purchases, the loan will allow 75% of gross projected rent to be used as income to qualify a borrower for the mortgage size needed or $1875.00 in extra net rental income to qualify in this example. So for this example the mortgage would be $191,250. That may be a principal & interest payment on a 30 year term of about $1022.00 a month (Interest rate @ 5% on 30 year term with APR @ 5.45%), then add annual property taxes and house insurance for a total payment. If that monthly total is less than the projected $2500.00 monthly gross rent, the Investor may have positive cash flow each month. Plus the property is totally renovated and would be perhaps easier to sell at some point with a profit. There is no pre-payment penalty on CHOICERenovation loans so selling is not restricted.
A significant difference over Fannie Mae HomeStyle is CHOICERenovation will allow a 1 unit Investment property refinance rehab mortgage to be up to 85% of the after renovated value. But HomeStyle is limited to 75% of after renovated value on a refinance rehab mortgage.
I have spoken with Investors who compare what a “Hard Money” lender will do and usually a conventional renovation loan offers a lower interest rate, lower fees and safety of a 30 year term. I’m excited that CHOICERenovation is here for Investors as an alternative to “Hard Money” loans.
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!