As a Loan Officer specializing in renovation financing I wanted to pass along 3 examples of how the Fannie Mae Conventional HomeStyle renovation mortgage has worked for clients of mine. My own view is this conventional rehab mortgage has not been explained well to consumers and not publicized well. I’m writing today to encourage those who either own a property needing rehab or those planning a property purchase of one that can use an update or repairs to consider HomeStyle to finance it. The HomeStyle mortgage provides funds to acquire the property and rehab funds all in the same mortgage, at the same interest rate amortized over 30 years in one closing. Here are three examples:
- Investor Purchasing a Single Family Home to Lease Out
- A client found a home being sold by HUD that had been foreclosed and processed, then placed for sale by HUD. These properties can be great deals but may require repairs and updates. You can search at https://www.hudhomestore.com/Home/Index.aspx by state, county, zipcode, etc. They may have a period where offers will be accepted only for those who will live in them. Afterward they are opened to investors who will rent them out or even sell them.
The Buyer purchased the single family home for $50,000 and will put in a new kitchen, new bath, new flooring, paint, new lighting, new appliances and basic general repairs. The renovation budget will include a 10% contingency reserve or basically an emergency fund should repairs exceed what is expected once construction begins. The total rehab budget came to $70,000 including soft costs like Building Permits and Architect Fees as well as the 10% Reserve off the base rehab budget of $60,000.
$50,000 to buy and $70,000 to renovate is $120,000 total. Buying as an investor rather than an owner who will occupy, the HomeStyle mortgage requires a 20% down payment of this total of $120,000. The down payment is then $24,000, leaving a mortgage of $96,000. In this location similar rehabbed homes have sold for $150,000 and up recently. This is what makes this mortgage possible, the “as finished” appraised value. The home is appraised based on rehab work to be done before closing so the buyer and the Lender know what the future value will be when rehab is completed in the future after closing. In this location the buyer expects to rent the house for $1200 a month which exceeds his total mortgage payment with taxes and insurance.
You might be wondering how the buyer can qualify for the loan and the answer is projected future rent. The HomeStyle rehab investor loan allows future rent, as determined by the Appraiser, to be used as extra income at 75% of gross per month. Specifically the future rent if found to be $1200 monthly, then 75% of that or $900 a month is given to the buyer as income to qualify for the loan.
- Purchase of Old Home to Rebuild
- A family wanted to buy a larger home in an area with better schools. They found one in their perfect location that had been abandoned and previously cut up into two apartments. It is some 130 years old. There was nothing original left to save in the house at all. Using HomeStyle they had the interior gutted and rebuilt with a contemporary floor plan, finished the basement, opened the attic for higher ceilings on the second floor and added a large deck off the kitchen. The house became 5 bedrooms and 3 and half baths. The extensive reconstruction lasted about one year. The house was reduced to a shell and interior totally rebuilt with insulation where there was none, new siding, new windows, new roofing, new plumbing, new electric and new HVAC.
The cost to purchase the home was $270,000. I always say “buy the worst house in the best location”. That’s exactly what they did which is part of the reason why the house cost what it did in its poor condition. The other homes in the area sell for more in better condition which can make a good comparable for the appraised value of the rehabbed home.
The rehab budget was $300,000 total. Added to purchase price of $270,000 the total invested is $570,000. The HomeStyle mortgage was in the amount of $417,000 with a $153,000 down payment. Future “as finished” value was found to be $670,000 based off the Contractor’s written renovation plan before the loan closed and prior to any rehab work done. But upon completion of construction the house was appraised again, now appraised at $710,000. The buyers have added $140,000 in new equity or the difference between the $570,000 purchase + rehab cost and current value of $710,000. Now they live in their dream house and enjoy it every day.
- Purchase of a 2 Unit to Rehab
- One of my clients wanted a 2 unit, traditional Chicago style brick “2 flat” to rehab and live in one apartment and lease out the other. He had a 30% down payment so HomeStyle worked better for him than FHA 203K. He found one for $160,000 that needed basic repairs of two new kitchens, two new baths, refinishing of flooring, new electric & plumbing, paint and new HVAC. The rehab budget total was $117,000. The total investment was the sum of those or $277,000. The HomeStyle mortgage was for 70% of that or $193,900.
The “as finished” value was determined to be $277,000 which worked fine for the loan approval. The Appraiser also projected the future rent from the second apartment to be $800 a month. HomeStyle allows 75% of that or $600.00 in this case to be used as extra income to qualify for the mortgage. As it turned out with taxes, principal & interest and insurance the monthly total monthly payment was $1147. The rent of $800.00 from the other apartment meant the buyer really has a cost of $347.00 each month to live there.
The HomeStyle loan is amortized over 30 years and with a 20% down payment or more, there is never any mortgage insurance to pay.
HomeStyle can also be used to purchase a second home or vacation home, either as a condo or a single family house. When HomeStyle is used to purchase and rehab a condominium it must meet Fannie Mae condominium standards.
I have had clients use HomeStyle to fund additions and renovations of the home they already own. The way it works as a refinance is the HomeStyle loan pays off the current mortgage and the rest of the funds are used to pay for the renovation. All based on the future “as finished” value the home will have when all the construction is completed.
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!