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Looking to renovate your home without the hassle of multiple loans? A HomeStyle Renovation Loan could be the perfect solution to finance your dream home while keeping everything under one roof.

Updated: November 5, 2024

Key Takeaways:

• > HomeStyle renovation loans allow you to combine a home purchase or refinance with renovation funds in one mortgage.
• > These loans offer flexibility, potential for lower interest rates, and the ability to boost your home’s value through upgrades.
• > To qualify, you’ll need to meet credit score, down payment, and renovation project requirements set by Fannie Mae-approved lenders.

What is a HomeStyle Renovation Loan?

A HomeStyle Renovation Loan is a type of mortgage that enables homeowners to finance home renovations, repairs, and improvements as part of their home purchase or refinance. Offered through Fannie Mae-approved lenders, these loans differ from similar options like the FHA 203(k) loan by providing more flexibility in terms of property types, renovation scopes, and loan limits.

Benefits of a HomeStyle Renovation Loan

The key advantages of a HomeStyle Renovation Loan include:

• > Flexibility: HomeStyle loans can be used for primary residences, second homes, and investment properties.
• > Variety of Eligible Improvements: Borrowers can finance everything from necessary repairs to luxury upgrades, as long as the renovations add value to the home.
• > Potentially Lower Interest Rates: Compared to personal loans or credit cards, HomeStyle loans may offer more competitive rates for financing home improvements.
• > Potential to Increase Home Equity: By combining your purchase or refinance with renovation funds, you can boost your property’s value and build equity faster.

The Basics: Loan Requirements and Terms

To qualify for a HomeStyle Renovation Loan, borrowers typically need a credit score of at least 620, though some lenders may have higher minimums. The down payment requirement is a minimum of 3% for eligible first-time homebuyers, and loan limits are based on the “as-completed” appraised value of the property, which factors in the post-renovation value.

HomeStyle loans are available for single-family homes, condos, townhouses, and 1-4 unit properties. Renovations must be completed within 12 months of loan closing, and the Loan-to-Value (LTV) ratio can be as high as 97% for primary residences and 85% for investment properties.

Eligible Renovations and Costs Covered

A wide range of renovations are allowed under a HomeStyle loan, including:

• > Cosmetic upgrades like new flooring, countertops, or painting
• > Structural changes such as room additions or basement finishing
• > Energy-efficient improvements like solar panels, insulation, or new windows

The loan can cover the costs of labor, materials, permits, and fees for architects, designers, and other professionals. However, certain luxury items like pools, outdoor kitchens, and repairs for properties deemed unfit for habitation are not eligible.

How the Loan Application Process Works

Finding an experienced lender is crucial when applying for a HomeStyle Renovation Loan. The key steps in the application process include:

• > Pre-qualification and assessing the renovation scope with the lender.
• > Working with a contractor to get accurate cost estimates and bids.
• > Obtaining an “as-completed” appraisal based on the post-renovation value.
• > Finalizing the loan approval and closing.

The timeline for approval and funding can take 4-8 weeks, depending on the complexity of the renovation project.

Steps to Take Before Applying

Before applying for a HomeStyle Renovation Loan, as a homeowners you should:

• > Evaluate your budget, ensuring they have funds for the down payment, closing costs, and contingencies.
• > Research potential renovations that will add the most value to their property.
• > Prepare all necessary financial documentation, including W-2s, pay stubs, tax returns, and proof of assets.
• > Find a licensed, insured, and experienced contractor to provide accurate cost estimates.

Costs Involved with HomeStyle Renovation Loans

The key costs associated with a HomeStyle Renovation Loan include:

• > Down Payment: Typically a minimum of 3% of the “as-completed” appraised value.
• > Interest Rates: Average rates are usually slightly higher than a standard mortgage but lower than FHA 203(k) loans.
• > Closing Costs: These can include origination fees, appraisal fees, and inspection fees.
• > Potential Additional Costs: Homeowners should budget for change orders, cost overruns, and contingencies.

Real-World Examples of HomeStyle Loan Usage

Example 1: First-Time Homebuyer Purchases and Renovates a Fixer-Upper

As a first-time homebuyer, Jenny had been searching for the perfect property to put her own stamp on. After months of looking, she finally found a promising fixer-upper in a desirable neighborhood, listed for $250,000.

Recognizing the home’s potential, Jenny decided to use a HomeStyle Renovation Loan to finance the purchase and planned renovations. She reached out to a Fannie Mae-approved lender and went through the pre-qualification process.

The lender’s appraisal determined the home’s “as-is” value was $250,000. Jenny planned to invest an additional $50,000 into the following renovations:

• > Completely remodel the outdated kitchen, including new cabinets, countertops, and appliances ($30,000)
• > Update the two bathrooms with modern fixtures and tilework ($12,000)
• >Enhance the home’s curb appeal with new landscaping, a fresh coat of paint, and upgraded front door and garage ($8,000)

Based on the estimated “as-completed” value of $325,000, the lender approved Jenny for a HomeStyle Renovation Loan with a 95% Loan-to-Value ratio. This allowed her to purchase the home and fund the full $50,000 in renovations through a single mortgage.

Once the renovations were finished, the home’s value had indeed increased to $325,000, as the lender had projected. This gave Jenny a significant boost in home equity, despite being a first-time buyer.

Jenny was thrilled with the results of her HomeStyle Renovation Loan experience. By combining the home purchase and renovations into one loan, she was able to transform the fixer-upper into her dream home while building substantial equity from the start.

Example 2: Current Homeowners Refinance to Fund Energy Upgrades

John and Sarah had been living in their 3-bedroom, 2-bathroom home for 10 years. The home was in good condition, but they were looking to make some major upgrades to improve its energy efficiency and reduce their monthly utility bills.

After researching their options, they decided a HomeStyle Renovation Loan would be the best way to finance the improvements they had in mind. They reached out to a Fannie Mae-approved lender and went through the pre-qualification process.

The lender determined that John and Sarah’s home was worth $350,000 in its current condition. They wanted to invest $75,000 in the following renovations:

• > Install a 5 kW solar panel system ($35,000)
• > Replace all windows with energy-efficient models ($25,000)
• > Add extra insulation to the attic and walls ($15,000)

Based on the “as-completed” appraised value of $400,000, the lender approved John and Sarah for a HomeStyle Renovation Loan with a 80% Loan-to-Value ratio. This allowed them to refinance their existing mortgage and borrow an additional $75,000 for the energy upgrades.

After the renovations were complete, John and Sarah noticed an immediate decrease in their monthly utility bills – they were saving almost $200 per month on electricity and gas. Additionally, the home’s resale value had increased to $425,000, giving them significantly more equity.

John and Sarah were thrilled with the long-term savings and added home value they achieved by using the HomeStyle Renovation Loan to fund their energy-efficient upgrades. The single loan made the process seamless and allowed them to make improvements that will benefit them for years to come.

Pros and Cons of HomeStyle Renovation Loans

• > Pros: Single loan for both the home purchase/refinance and renovation costs, potential for higher resale value by incorporating desired improvements, greater range of renovations allowed compared to other loan options.
• > Cons: May require a higher credit score than FHA 203(k) loans, possibly longer approval process, risk of exceeding the renovation budget or encountering appraisal issues.

Comparing HomeStyle Renovation Loan Rates

HomeStyle Renovation loan rates are generally comparable to other conventional mortgage rates, but they can vary based on factors like borrower creditworthiness, loan-to-value ratio, and the specific lender. Here’s how they compare to other types of renovation and mortgage loans:

Cash-Out Refinance

Rates: HomeStyle loans tend to be slightly higher than traditional conventional mortgages like a cash-out refinance. This is because the lender assumes added risk with the renovation component.

Comparison: HomeStyle rates may be close to or slightly above conventional rates for borrowers with strong credit. However, since they offer flexibility by rolling renovation costs into the mortgage, they’re often more affordable than taking a separate loan for renovations.

FHA 203(k) Loans

Rates: FHA 203(k) loans, which also cover purchase and renovation costs, generally have higher interest rates than HomeStyle loans. FHA loans carry additional mortgage insurance premiums (MIP), which adds to the total cost.

Comparison: For borrowers with good to excellent credit, HomeStyle can be more affordable than 203(k) because it lacks ongoing mortgage insurance, which is required for FHA loans regardless of down payment size.

Home Equity Loans or HELOCs

Rates: Home equity loans typically have higher fixed rates than HomeStyle loans, while Home Equity Lines of Credit (HELOCs) have variable rates, which can start low but rise over time.

Comparison: For smaller renovations, a HELOC or home equity loan might offer flexibility and lower fees. However, for larger projects, HomeStyle’s fixed rate can be more predictable and potentially lower overall, especially with a primary mortgage interest rate.

Personal Loans or Credit Cards

Rates: Personal loan rates are typically higher than HomeStyle loans, especially for borrowers with mid-range credit scores. Credit card interest rates are usually much higher than any mortgage product.

Comparison: Using HomeStyle is often more cost-effective for larger renovation projects compared to high-interest personal loans or credit cards, which can have interest rates in the double digits.

Bottom Line

For borrowers with good credit, HomeStyle Renovation loans often offer more competitive rates than FHA 203(k) and personal loans, especially when considering the combined financing of home purchase and renovation. But for smaller, short-term projects, home equity products might sometimes be more advantageous.

End Note: Is the Right Loan for You?

A HomeStyle Renovation Loan can be an attractive option for homebuyers and homeowners who want to finance a wide range of home improvements, from necessary repairs to value-enhancing upgrades. By combining the home purchase or refinance with renovation funds, these loans can help you boost your property’s value and build equity faster.

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