Last month, a young couple here in Louisville found what they called "the perfect house"—except it wasn't perfect at all. The kitchen hadn't been updated since the ’80s, the bathrooms desperately needed work, and the electrical system made their home inspector nervous. They were heartbroken because they loved the location and the bones of the house, but they couldn't afford to buy it and then take out another loan for renovations.
That's when we started talking about HomeStyle loans.
In my Master’s of Social Work (MSW) program, we're learning about economic barriers to homeownership and how structural systems either support or hinder people trying to build wealth through real estate. The Fannie Mae HomeStyle Renovation loan represents one of those system-level solutions that actually works—it allows you to finance both the purchase and renovation of a property with a single mortgage, single closing, and one monthly payment.
Think of it like this: instead of juggling multiple loans, navigating different approval processes, and managing separate interest rates, you're streamlining everything into one comprehensive financing package. For first-time buyers especially, this can be the difference between walking away from a home with potential and actually being able to afford your dream property.
Before we dig into the details, I want to clarify something that confuses a lot of people. Fannie Mae doesn't actually lend you money directly. The Federal National Mortgage Association—known as Fannie Mae—is a government-sponsored enterprise that purchases mortgages from lenders, bundles them into mortgage-backed securities, and sells those to investors. This process removes debt from lenders' books and frees up capital so they can make more loans to other borrowers.
What Fannie Mae does is set the standards and guidelines for the loans they'll purchase. When you get a "Fannie Mae HomeStyle loan," you're really getting a mortgage from an approved lender that follows Fannie Mae's specific requirements for renovation loans.
The HomeStyle Renovation loan differs significantly from a standard conventional mortgage. While conventional loans finance the purchase or refinance of a home in its current condition, the HomeStyle loan bases your borrowing amount on the future value of the home after renovations are complete. This "as-completed" appraisal approach gives you substantially more borrowing power than traditional financing.
Let's walk through a real example with actual math so you can see exactly how this plays out:
Home purchase price: $200,000
Planned renovation costs: $80,000
Total project cost: $280,000
As-completed appraised value: $320,000
Required down payment: $14,000 (5% of $280,000)
Loan amount: $266,000
Maximum renovation amount allowed: $240,000 (75% of $320,000)
Your actual renovation cost of $80,000 falls well within this limit
Put 5% down on the $200,000 purchase ($10,000)
Secure a separate $80,000 construction or home equity loan
Qualify for both loans simultaneously
Manage two separate monthly payments
The HomeStyle approach consolidates everything, and because you're borrowing against the improved value, you have access to more funds while keeping your monthly payment manageable.
One thing I've learned working in project management is that understanding the process upfront prevents surprises later. Fannie Mae structures HomeStyle loans in three distinct phases, and each one has specific requirements and timelines.
This initial phase requires the most coordination but sets the foundation for everything that follows.
You'll need to choose a licensed contractor before you even apply for the loan. Your lender will verify that the contractor is properly licensed, bonded, insured, and financially stable. The lender isn't just checking credentials - they're ensuring this contractor can actually complete the work on time and within budget.
Scope of work descriptions
Material specifications
Labor cost estimates
Project timeline (remember, all work must finish within 12 months)
Itemized budget
Your lender reviews both your financial qualifications and the renovation plans. They're assessing whether you can afford the combined purchase and renovation costs.
Here's where the process differs from traditional mortgages. The appraiser evaluates the property twice:
Current "as-is" value
Projected "as-completed" value based on your renovation plans
The lender uses the as-completed value to determine your maximum loan amount, which is why detailed, realistic renovation plans are so critical.
Your lender calculates your maximum loan amount using the lesser of:
Purchase price plus renovation costs, OR
As-completed appraised value
Then they apply the 75% renovation cost cap. Using our earlier example with a $320,000 as-completed value, you could borrow up to $240,000 for renovations (75% of $320,000). But since your actual renovation costs are only $80,000, this cap doesn't restrict you.
Once you're approved, you'll proceed to closing just like any other mortgage. But there are some unique elements:
You sign standard mortgage documents
An additional renovation loan agreement
Funds for the purchase go to the seller
Renovation funds go into a custodial escrow account
The Draw Schedule:
Renovation funds don't get released all at once. Instead, your contractor submits "draw requests" as work progresses. Here's how a typical draw schedule might look:
Initial Draw (10%): Released at closing for materials and mobilization
First Progress Draw (20%): After demolition and rough-in work
Second Progress Draw (30%): After framing, electrical, plumbing inspection
Third Progress Draw (25%): After drywall, flooring, fixtures installed
Final Draw (15%): After final inspection and certificate of completion
Work matches the approved plans
Quality meets standards
Progress justifies the payment request
The final phase involves wrapping up all loose ends:
Final Inspection Your lender orders a comprehensive inspection to verify:
All work completed per approved plans
Code compliance
Proper permitting and inspections by local authorities
Satisfactory quality and workmanship
Title Verification
The lender orders a final title search to ensure no unexpected liens or claims have been filed against the property during renovation.
Certificate of Completion
The appraiser signs a certificate confirming the renovations match the as-completed appraisal assumptions.
Apply to your principal balance as a payment
Get refunded to you for documented additional improvements with receipts
The entire process typically takes 45-60 days from application to closing, plus your 12-month renovation window.
The flexibility of HomeStyle loans extends to the types of properties you can finance. According to Fannie Mae's guidelines, eligible properties include:
Single-family detached homes
Townhomes
Condominium units in approved projects
Co-op units
Planned Unit Developments (PUDs)
Manufactured homes (with limitations)
Duplexes (2 units)
Triplexes (3 units)
Fourplexes (4 units)
One-unit second homes
One-unit investment properties
Renovations cannot include structural changes exceeding 50% of the home
No adding garages or other attached structures
Permitted improvements include: windows, doors, siding, roofing (as long as these don't alter the structure)
The down payment requirements vary based on several factors. Let me break down exactly what you'll need:
Minimum 5% down payment
Maximum loan-to-value (LTV) ratio: 95%
If you put less than 20% down, you'll pay private mortgage insurance (PMI)
Minimum 10% down payment
Maximum LTV ratio: 90%
PMI requirements apply below 20% equity
Minimum 15% down for purchases
Minimum 25% down for refinances
Maximum LTV: 85% (purchase) or 75% (refinance)
Here's where first-time buyers can really benefit. If you qualify for Fannie Mae's HomeReady program (designed for low-to-moderate income borrowers), you can combine it with HomeStyle:
Minimum 3% down payment
Must be a primary residence only
Credit score minimum: 620
Income limits apply based on area median income
Property must be in an eligible census tract OR borrower's income must be at or below 80% of area median income
Think of it like this: the HomeReady program opens the door to homeownership with minimal down payment, while the HomeStyle component lets you renovate a property that might otherwise be unaffordable in updated condition.
When you put down less than 20%, PMI protects the lender if you default. Here's what that actually costs:
Loan amount: $266,000
PMI rate: approximately 0.5-1.5% annually (varies by credit score)
Monthly PMI cost: $111-$333
You can request PMI cancellation once you reach 20% equity through:
Regular payments building equity
Home value appreciation
Both combined
The beauty of HomeStyle loans is their flexibility regarding renovation types. As long as work completes within 12 months and improves the property, you have broad options.
Foundation repairs and reinforcement
Roof replacement or major repairs
Adding or removing walls (with proper permitting)
Structural reinforcement for code compliance
Complete HVAC system replacement
Electrical panel upgrades and rewiring
Plumbing system modernization
Septic or sewer line replacement
Water heater replacement
Kitchen remodels (cabinets, countertops, appliances, flooring)
Bathroom renovations (fixtures, tiling, vanities)
Flooring replacement throughout
Interior paint and finishes
Built-in storage solutions
New siding or exterior cladding
Window and door replacement
Deck, patio, or porch construction
Landscaping and grading
Driveway and walkway installation
Fence construction
Wheelchair ramps
Widened doorways
Accessible bathroom fixtures
Stairlifts or elevators
First-floor bedroom conversions
Insulation improvements
Energy-efficient windows
Solar panel installation
High-efficiency HVAC systems
LED lighting systems
Room additions
Garage construction
Accessory Dwelling Units (ADUs) or in-law suites
Finished basements or attics
Sunrooms or enclosed porches
Complete demolition of the existing structure
Building a separate, detached second dwelling
Structural changes exceeding 50% of a manufactured home
Luxury improvements like outdoor kitchens exceeding reasonable value
Non-permanent improvements (furniture, portable sheds, certain landscaping)
If you're handy, you can save money by doing some work yourself, but there are strict parameters:
Only available for one-unit primary residences
Not permitted for manufactured homes
DIY work cannot exceed 10% of the as-completed property value
Lender must review and preapprove all DIY work
Any DIY project costing over $5,000 requires lender inspection
You can receive reimbursement for materials only, not labor
Interior painting
Flooring installation (if you have documented experience)
Basic landscaping
Minor carpentry (shelving, trim work)
Cosmetic fixture updates
Electrical work requiring permits
Plumbing modifications
Structural changes
HVAC installation
Roofing
Anything requiring licensed contractors by local code
Beyond the purchase price and renovation costs, you can finance several additional expenses through your HomeStyle loan:
Up to 6 months of PITI (principal, interest, taxes, insurance) payments if you can't live in the home during renovations
Permit and license fees
Architectural and engineering fees
Energy-related inspections and certifications
Title insurance and closing costs
Project contingency reserves (typically 10-15% of renovation costs)
Consultant fees for specialized assessments
If your renovations make the home uninhabitable, Fannie Mae allows you to finance up to 6 months of mortgage payments. This gives you time to find temporary housing without the financial squeeze of paying both rent and your mortgage simultaneously.
Let's talk about what you actually need to qualify. In my MSW program, we study how lending requirements can create systemic barriers to wealth building, so I appreciate that HomeStyle loans offer relatively accessible standards.
Individual lenders may require higher scores
Your credit score affects your interest rate
Scores in the 620-680 range often receive less favorable pricing
760+: Best available rates
700-759: Slightly higher rates (approximately 0.25% more)
680-699: Moderately higher rates (approximately 0.5% more)
620-679: Highest rates (approximately 0.75-1.0% more)
Improving Your Credit Score:
If you're close but not quite at 620, or want better rates:
Pay down credit card balances below 30% utilization
Dispute any errors on your credit reports
Avoid opening new credit accounts
Make all payments on time for at least 6 months
Consider having credit-building accounts added to your report
Maximum DTI: 50%
Your debt-to-income ratio compares your monthly debt obligations to your gross monthly income.
Add all monthly debt payments:
Future mortgage payment (including PMI, taxes, insurance)
Car loans
Student loans
Credit card minimum payments
Personal loans
Any other recurring debt
Divide by gross monthly income
Multiply by 100
Gross monthly income: $6,000
Monthly debts: $2,800 (proposed mortgage: $1,800, car: $400, student loans: $500, credit cards: $100)
DTI: $2,800 ÷ $6,000 = 0.467 = 46.7%
This borrower qualifies (below the 50% maximum).
Pay off smaller debts entirely
Increase your income through raises or side work
Avoid taking on new debt before applying
Consider having co-borrowers to increase household income
Last 2 years of W-2 forms
Last 2 years of tax returns
Most recent 30 days of pay stubs
Verification of employment from your employer
Last 2 years of complete tax returns (personal and business)
Year-to-date profit and loss statement
Business bank statements
CPA-prepared financials (if available)
Social Security or pension statements
Disability income verification
Investment income documentation
Rental income (with 2 years of tax returns showing this income)
Fannie Mae's conforming loan limits increased in 2025. These limits apply to your total loan amount, including both purchase price and renovation costs.
1-unit property: $806,500
2-unit property: $1,032,650
3-unit property: $1,248,150
4-unit property: $1,551,250
High-Cost Area Limits:
Certain counties and metropolitan areas with expensive real estate markets qualify for higher limits:
1-unit property: $1,209,750
2-unit property: $1,548,975
3-unit property: $1,872,225
4-unit property: $2,326,875
California
Colorado
Connecticut
District of Columbia
Florida
Idaho
Maryland
Massachusetts
New Hampshire
New Jersey
New York
Pennsylvania
Tennessee
Utah
Virginia
Washington
West Virginia
Wyoming
You can check whether your specific property location qualifies for high-cost limits using the FHFA's online lookup tool at fhfa.gov.
Baseline limits are 150% higher than continental U.S.
No separate high-cost designations within these territories
HomeStyle loan interest rates typically match conventional mortgage rates, which work in your favor compared to alternative financing methods.
Your credit score
Down payment percentage
Property type (primary residence vs. investment)
Loan amount
Market conditions
Primary residence, 20% down, 760+ credit: 6.125%-6.500%
Primary residence, 5% down, 700 credit: 6.500%-7.000%
Investment property, 25% down, 740 credit: 6.875%-7.375%
Let's compare the true cost of a HomeStyle loan versus alternatives using a realistic scenario:
Combined loan: $266,000 at 6.5%
Monthly payment: $1,682
Total interest over 30 years: $339,120
First mortgage: $190,000 at 6.5% = $1,201/month
Home equity loan: $80,000 at 8.5% for 15 years = $787/month
Combined payment: $1,988/month
Total interest: $296,220 (first) + $61,660 (equity) = $357,880
Savings with HomeStyle: $18,760 over the life of the loans, plus you avoid the complexity of managing two separate loans.
First mortgage: $190,000 at 6.5% = $1,201/month
Personal loan: $80,000 at 11% for 5 years = $1,742/month
Combined payment: $2,943/month for 5 years, then $1,201/month
Total interest: $296,220 (first) + $24,520 (personal) = $320,740
While total interest is lower, the initial monthly burden of $2,943 is significantly higher and may be difficult to manage.
30-year fixed rate (most common)
20-year fixed rate
15-year fixed rate
10-year fixed rate
Adjustable-rate mortgages (ARMs): 5/1, 7/1, 10/1
When considering renovation financing, you have several options. Let me walk through how they stack up.
The FHA 203(k) is HomeStyle's closest competitor.
Combines purchase and renovation into one loan
Single closing and monthly payment
Work must complete within specified timeframe
Funds held in escrow and released as work progresses
Lower minimum credit score: 580 (vs. 620 for HomeStyle)
Lower down payment: 3.5% (vs. 5% standard HomeStyle)
More lenient qualification standards
No upfront mortgage insurance premium (FHA charges 1.75% upfront)
Lower monthly mortgage insurance (typically)
Can be used for investment properties and second homes
Higher loan limits in many markets
Fewer contractor restrictions
More renovation flexibility
Which Is Better?
If your credit score falls between 580-619, FHA 203(k) is your only option. If you qualify for both, run the numbers including:
Total insurance costs (PMI vs. FHA MIP)
Interest rate differences
Loan limits for your property
Contractor flexibility needs
Home equity loans let you borrow against equity you've already built in your home.
Simpler application process
Faster funding
Can be used for any purpose
Fixed interest rate
Available when you're purchasing (home equity requires existing ownership)
Lower interest rates
Longer repayment terms
Tax deductibility potentially better for acquisition debt
Doesn't require existing equity
Best For: Existing homeowners who have built substantial equity and need renovation funds. Not viable for purchase transactions.
HELOCs function like credit cards secured by your home equity.
Flexibility to draw funds as needed
Interest-only payment options during draw period
Can use for any purpose
No upfront draw required
Predictable fixed-rate payment
Lower interest rates (HELOCs typically variable)
Better for large, planned renovation projects
Available when purchasing a home
Best For: Ongoing renovation projects where you're uncertain about total costs or timing. Not suitable for purchase transactions.
Some people consider unsecured financing for renovations.
Dramatically lower interest rates (6-7% vs. 10-20%+)
Longer repayment terms reducing monthly payments
Larger borrowing amounts available
Secured by real estate creates tax advantages
Builds home equity
When Unsecured Debt Might Work:
Only for very small projects under $10,000 where you can pay off the balance quickly.
Since Fannie Mae doesn't lend directly, you'll need to find an approved lender. Not all mortgage companies offer HomeStyle loans because they require specialized knowledge and additional processing complexity.
Wells Fargo
Bank of America
Chase
U.S. Bank
PNC Bank
Truist Bank
Capital One
Fifth Third Bank
Regions Bank
Huntington Bank
KeyBank
M&T Bank
Navy Federal Credit Union
Pentagon Federal Credit Union
State Employees' Credit Union
Local community credit unions in your area
"Do you offer Fannie Mae HomeStyle Renovation loans?" (Some say yes to renovation loans but only mean FHA 203(k))
"How many HomeStyle loans have you closed in the past 12 months?"
"What is your average time from application to closing for HomeStyle loans?"
"Do you have relationships with contractors you recommend?"
"What renovation costs do you typically see financed?"
"Can you provide references from recent HomeStyle borrowers?"
"What are your current rates and fees for HomeStyle loans?"
This is critical: According to Federal Reserve research, borrowers who compare offers from at least three lenders can save thousands of dollars over the life of their loan.
Get Rate Quotes Within 14 Days:
Multiple mortgage inquiries within a 14-day window count as a single inquiry for credit scoring purposes, so shop aggressively during this period without fear of damaging your credit.
Compare the Loan Estimate:
Each lender must provide a standardized Loan Estimate form within three business days of your application. Compare:
Interest rate
Annual Percentage Rate (APR) — includes fees
Estimated closing costs
Estimated monthly payment
Total loan costs over 5 years
While we don't currently offer HomeStyle loans specifically, AmeriSave provides competitive conventional mortgage options that can help you purchase a home with confidence. Many of our borrowers start with a conventional mortgage for their purchase and later explore renovation financing options once they've built equity.
Our streamlined digital application process, competitive rates, and experienced loan officers make the mortgage process straightforward. Whether you're a first-time buyer, real estate investor, or experienced homeowner, we're here to help you understand your financing options and find the right solution for your situation.
Let me walk you through a complete example so you can see how all these pieces fit together.
Combined gross monthly income: $7,500
Credit scores: 710 (both)
Current debts: $600/month (car payment + student loan)
Savings: $25,000
Found a 1950s ranch home listed at $185,000 in a neighborhood where updated homes sell for $260,000
Kitchen remodel: $35,000
Two bathroom updates: $20,000
New HVAC system: $12,000
Flooring throughout: $15,000
New roof: $18,000
Total renovation budget: $100,000
Purchase price: $185,000
Renovation costs: $100,000
Total project cost: $285,000
As-completed appraised value: $265,000
Down payment (5%): $14,250
Loan amount: $270,750
Qualification Check:
Monthly PITI payment: $1,956
Total monthly debts: $2,556 ($1,956 + $600)
DTI: $2,556 ÷ $7,500 = 34%
☒ Under 50% maximum DTI
✓ Credit scores exceed 620
✓ Renovation amount ($100,000) is less than 75% of as-completed value
Month 1: Selected contractor, developed renovation plans, applied for loan
Month 2: Completed underwriting, ordered appraisal
Month 3: Closed on loan in early part of month
Months 3-8: Renovations completed with 5 draw requests
Month 9: Final inspection, certificate of completion
Monthly payment: $1,956 (including PMI of $189)
Purchased home for: $185,000
Renovation cost: $100,000
Total investment: $285,000 + $14,250 down = $299,250
Current home value: $265,000
Instant equity: $5,750 after accounting for no REALTOR® fees
Once the Johnsons reach 20% equity ($53,000), they can remove the $189 monthly PMI, reducing their payment to $1,767.
Based on my experience managing projects and seeing a lot of renovation work, here are some things to avoid:
Always add 10% to 15% to the estimate your contractor gives you. When walls are opened up, problems like old wiring, water damage, and foundation issues show up.
Ask at least three recent clients for references
Check with your state's licensing board to make sure your license is still valid.
Make sure you have enough insurance coverage
If you can, look over their work in person.
Write down everything
Unclear plans for renovations cause arguments, delays, and going over budget. Spend time up front on:
Full specifications
Choosing materials before starting
A clear scope of work
Timelines that make sense
Procedures for writing change orders
Delays in getting materials
Problems with the weather
Delays in inspections
Unexpected discoveries requiring additional work
Your as-completed value has to make sense for the area. A $200,000 home in a neighborhood where homes sell for $220,000 can't afford a $150,000 renovation. The appraiser won't assign value beyond comparable properties.
Some people who borrow money try to live in homes that are only partially renovated, even though it's not safe or practical. Keep in mind that you can get a loan to pay for up to six months of mortgage payments for temporary housing.
You could say that HomeStyle loans are great in some situations and not so great in others. They don't work for everyone.
You're buying a house that needs a lot of work (more than $20,000)
Your renovation costs can't be more than 75% of the value of the property after the work is done.
You meet the requirements for credit and income
You are at ease working with contractors and overseeing a remodeling project
You want to build equity right away
You're buying in a seller's market where homes that have been updated are too expensive.
You can wait a year for the renovations to be done.
You only need minor cosmetic changes that cost less than $15,000
Your credit score is lower than 620 (try FHA 203(k)).
You're buying a home that is ready to move into
You want to move in right away
You don't have time to manage a renovation project
You already own the house and have built up equity in it (home equity products may be easier).
In my MSW classes on housing policy and economic justice, we look at how different types of financing can help or hurt different groups of people build wealth. HomeStyle loans are an intervention at the system level that gets rid of a big barrier: the need for separate construction financing. By combining the costs of buying and fixing up a home into one loan, they make it possible for people with moderate incomes to compete for homes that cash buyers with more money might otherwise have a better chance of getting.
However, you still need a lot of knowledge to use the program correctly, and not all lenders are equally familiar with these loans. Having a lender who knows what they're doing and has done a lot of HomeStyle transactions makes a huge difference in your experience and the outcome.
The Fannie Mae HomeStyle Renovation loan has helped thousands of people buy homes that they couldn't have bought in their current condition. HomeStyle loans level the playing field between buyers who have cash on hand for renovations and those who need to borrow money to make improvements. They do this by combining the cost of the home and the cost of renovations into one mortgage with one monthly payment and competitive interest rates.
You need to be patient, plan ahead, and pay attention to the details during the approval and renovation process. You'll spend more time up front making plans for the renovations, picking the right contractors, and working with your lender. But this hard work up front pays off because it gives you access to properties that can build equity right away and have monthly payments that are much easier to handle than having to deal with several loans with different interest rates.
HomeStyle loans are a way for first-time home buyers to buy a home in competitive markets where turnkey properties cost a lot of money. You can get to the house that needs work when you can pay for the repairs with a mortgage instead of cash or high-interest short-term debt.
To get the most out of HomeStyle loans, you need to work with professionals who know what they're doing at every step. This means lenders who are used to processing these loans, contractors who are okay with the draw schedule and inspection requirements, and real estate agents who know how to look at properties based on their potential rather than their current condition. HomeStyle loans can open up new housing options for you if you have the right team and realistic expectations about the process.
It usually takes 45 to 60 days from applying for a HomeStyle loan to closing, which is a little longer than a regular mortgage. The extra time is needed for the contractor verification process, the in-depth review of the renovation plan, and the specialized as-completed appraisal. Your lender needs to check your contractor's credentials, go over the whole scope of work, and hire an appraiser to look at the property's current condition and what it will be worth after the work is done.
You can start work on the renovations right away after you close on the loan. At closing, the renovation money goes into a custodial escrow account. Your contractor can start work as soon as you're ready. You and your lender will set up a draw schedule so that money is released as the work is done and inspections show that each phase is done.
The most important time limit is that all of the work on the renovations must be done within 12 months of the closing date. Fannie Mae has set a firm deadline, so it's important to work with contractors who can stick to realistic schedules. I always tell first-time home buyers to plan for extra time in case things go wrong. Weather, backorders on materials, and problems that come up during renovations can all make things take longer. That's why it's a good idea to set a target completion date of eight or nine months ahead of the 12-month deadline.
Yes, of course. HomeStyle refinance loans are like buying a home, but they use your current home as the base. The loan pays off your current mortgage and gives you extra money for renovations based on the appraised value of the house after the work is done. This can be a great way to make your current home better without having to deal with the higher interest rates that come with home equity loans or HELOCs.
When you refinance, you have to choose a contractor, plan the renovations, and get approval, just like when you buy a HomeStyle loan. Your lender will look at your home as it is now and guess how much it will be worth after the renovations. The renovation escrow account gets the difference between your current mortgage balance and the new loan amount (after closing costs).
But there are some important things to think about when it comes to refinance HomeStyle loans. The type of property you have will determine the highest loan-to-value ratio. You can usually refinance up to 75% of the as-completed value of your main home. You can't refinance an investment property for more than 75% of its value, which means you need at least 25% equity in the property before you can make any changes. Also, if your current interest rate is much lower than the current market rate, you should carefully figure out whether the benefits of the renovation funding are worth the cost of refinancing into a higher rate. Even though the rates on the second loan are higher, it may make more sense for you to keep your current low-rate mortgage and use a home equity product.
Cost overruns are one of the most common problems that come up during a renovation, and HomeStyle loans have specific rules for how to deal with them. The best way to protect yourself is to include a backup fund in your first budget. Most lenders will approve including a 10 to 15% contingency allowance in your renovation budget specifically for unexpected costs. If you need to do more work, you can use this reserve, which stays in the escrow account.
If your contingency reserve isn't enough and you need more money than your approved renovation budget, you have a few options, but none of them are easy. Once you've closed on your HomeStyle loan, you can't get more money because the loan amount was based on the first appraisal and approval. You would have to pay for extra costs with your own money, a credit card, or a separate personal loan instead. That's why it's so important to plan ahead and make a realistic budget with enough money set aside for emergencies before you close on the loan.
You can deal with some cost increases by changing the scope of work within your total approved budget. For instance, if you find plumbing problems that cost an extra $10,000, you might put off or cut back on another planned improvement to stay within your budget. Your lender can agree to changes in the scope as long as the total budget doesn't go up and the changes don't change the assumptions about the as-completed value.
I always suggest getting a pre-renovation inspection from a qualified home inspector who can find likely hidden problems before you set your budget. This will help you avoid unexpected costs. A full inspection that costs between $300 and $500 can find issues with the plumbing, electrical systems, foundation, or structure that you might not have known about until the demolition started. Also, experienced contractors who know about renovation loans know how important it is to thoroughly assess the site and usually give more realistic budgets that take into account what they are likely to find in older homes.
Yes, one of the best things about HomeStyle loans is that they let you buy homes in almost any condition, even ones that aren't livable right now. The renovation doesn't have to make the house livable when you close. You can buy a house that needs a lot of structural work, repairs to the foundation, or new systems, as long as the total cost of the renovations stays below 75% of the as-completed value and all of the work can be done in 12 months.
Fannie Mae rules say that you can borrow up to six months' worth of mortgage payments as part of the loan if the property isn't safe or practical to live in while it's being renovated. These payments go into your escrow account and are used to pay for your PITI costs while you live somewhere else during the renovation. This stops you from having to pay both your mortgage and your rent at the same time, which would be a lot of money.
But there are some limits on how bad structural work can be. You can't tear down the whole building and start over. The renovation must include making changes and improvements to the building that is already there, not tearing it down and starting over. HomeStyle loans won't cover a manufactured home if it needs more than about 50% of its structure replaced. If you're fixing and improving a site-built home instead of completely replacing it, you have more freedom with extensive structural work.
The most important thing is to hire contractors who are used to doing big renovations and lenders who know how to properly document and process loans for properties that are in very bad shape. In these cases, the as-completed appraisal is even more important because the difference between the current condition and the projected value is bigger. Your appraiser needs to be sure that the planned improvements will really raise the value to the level you expect. To do this, you need detailed, believable renovation plans from qualified contractors.
A lot of first-time home buyers ask me this question, and the answer depends mostly on your credit history, how much money you can put down, and the type of property you're buying. Both loans are used for similar things, but they have different requirements for getting them and how much they cost.
If your credit score is between 580 and 619, the FHA 203(k) is your only choice because HomeStyle needs a score of at least 620. Even if you meet the requirements for both programs with a score of 620 or higher, you need to do a full cost comparison because the insurance structures are very different.
FHA loans require you to pay 1.75% of the loan amount as an upfront mortgage insurance premium. This is usually added to the loan balance. That adds $4,725 to your principal on a $270,000 loan. FHA also charges an annual mortgage insurance premium (MIP) no matter how much you put down. If you put down less than 10%, this MIP stays in place for the life of the loan. The monthly MIP for a $270,000 loan is between $190 and $240, depending on the length of the loan and the LTV ratio.
There are no upfront insurance costs with HomeStyle loans. If you put down less than 20%, you'll have to pay private mortgage insurance, which costs between $90 and $330 a month, depending on your credit score and how much you put down. PMI automatically ends when you reach 20% equity through payments or appreciation. FHA MIP, on the other hand, lasts forever for loans with low down payments.
If you have good credit (above 680) and can afford a 5% down payment, HomeStyle is usually a better long-term value because you can get rid of the mortgage insurance eventually. If you have credit between 620 and 680 and can only put down 3.5%, the FHA 203(k) might be a better option for you, even though it has permanent insurance. This is because the lower down payment means you won't need as much cash right away.
Another thing to think about is how flexible the property type is. HomeStyle loans can be used for primary residences, second homes, and investment properties. FHA 203(k) loans can only be used for primary residences. HomeStyle is the only program you can use to buy an investment property or second home that needs work.
This kind of frustration happens more often than it should, especially in areas where contractors have steady work and don't want to deal with the extra paperwork and oversight that HomeStyle loans need. Some contractors don't like renovation loans because they would rather get paid all at once than in installments with inspections required before each payment is made.
First, ask your lender for recommendations for contractors. Many lenders who regularly process HomeStyle loans have built relationships with contractors who are good at working within this framework. These contractors know what paperwork is needed, are familiar with the inspection process, and know how to submit the right draw requests to keep the money coming in as work goes on.
You can also call local contractor associations or trade groups and ask for members who have worked with renovation mortgages before. Contractors who work on older homes or big remodels are more likely to know about renovation loans because they often work with buyers who need money.
Be ready to pay a little more to contractors who have worked with renovation loans before. The extra paperwork, administration, and coordination of inspections are all real work that experienced contractors include in their bids. However, it's worth paying a little extra to hire a contractor who knows how to do the job right instead of someone who doesn't and might have trouble with the paperwork and cause delays.
If you can't find any qualified contractors in your area who are willing to work with HomeStyle loans, you might need to think about whether this loan product is right for you. If there aren't many contractors available in your area, an FHA 203(k) might be a better option because these loans are more common in some areas. Alternatively, you might want to think about buying a home that needs less work and is in better shape.
Keep in mind that your lender has to approve your contractor based on their license, bond, insurance, and financial stability. You can only move forward with the loan if the person you find is willing to work with HomeStyle terms and meets Fannie Mae's contractor qualification standards.
The draw schedule is an important part of HomeStyle loans that protects both you and the lender by making sure that work is done correctly before money is released. Most of the time, draw schedules break up the renovation budget into four to six payments that are due when certain construction milestones are reached.
A normal draw schedule might be 10% at closing for materials and moving in, then 20% to 30% at the end of each major phase. For instance, the first progress draw might be released after the demolition and rough-in work is done, the second after the framing and mechanical inspections are done, the third after the drywall and flooring are done, and the last draw after all the work is done and passes the final inspection.
Before each draw is released, the lender hires a qualified inspector to check that the work listed in the draw request has been done according to approved plans and meets quality standards. It usually takes three to five business days to set up and finish this inspection. The lender processes the draw payment after the inspector's report says that progress is satisfactory. This takes another three to seven business days. It will take 7 to 14 days from the time you send in your draw request until the money is in the contractor's account.
Some contractors have trouble with this timeline, especially smaller ones that don't have a lot of cash on hand. They want to be paid right away after finishing the work instead of having to wait two weeks for an inspection and processing. This stress is real, which is why it's so important to work with contractors who know how to handle renovation loans.
To deal with cash flow issues, contractors often set up their draw requests so that they are a little behind the actual work being done. They're getting paid for work that was done a week or two ago, which means they're always working a little ahead of their payment schedule with their own money. Contractors who have enough cash on hand and know how to get renovation loans build this delay into their plans and prices.
If your contractor really can't handle the gap in cash flow between finishing work and getting paid, it could mean that they don't have enough money saved up to handle this kind of project. Fannie Mae requires lenders to check that contractors have enough money to finish the job because contractors who live paycheck to paycheck often have trouble getting draw-based funding.
If your contractor is buying materials and is having trouble with cash flow, you could offer to pay for some of them directly. But be careful not to get too involved in paying suppliers directly, because this can make it hard to keep track of what you've paid and make your final accounting more difficult. Keep detailed records of any direct payments and make sure your lender is aware of them.
After your loan closes, any changes you want to make to your renovation plan must be approved by your lender. The process will depend on the type and size of the changes you want to make. It's usually easy to make small changes that don't change the overall budget or the main scope of work. For instance, if you want to change the flooring materials to something else that costs about the same, change the paint colors, or upgrade the fixtures within the budgeted amount, you usually just need to tell your lender and update the project paperwork.
Changes that have a big effect on the scope of work, raise costs, or change the assumptions about the value of the work when it's done are harder. Keep in mind that the amount of your loan was based on a specific appraisal that used your original plans for the renovation. If you want to add a bathroom that wasn't in the original plans, take away a planned kitchen remodel, or make other big changes, your lender needs to look at the changes again to see if they change the loan-to-value ratio or the project's overall feasibility.
It's especially hard to add to the scope of a project when it costs more because you can't raise the amount of your loan after it closes. You will need to pay for the extra work with your own money, not money from your loan that you put in an escrow account, if you decide you want to add $15,000 worth of work that wasn't in your original plans. The escrow account only has the money that was agreed upon at closing.
On the other hand, if you decide to cancel planned work and lower the total cost of your renovation, you can't just get the extra money as cash. Fannie Mae says that if you have extra money after the renovations are done, you can either apply it to your principal balance as a prepayment or get it back if you show receipts for extra work that wasn't part of your original plan.
When you change an order, you usually have to send your lender updated plans, have your contractor give you new cost estimates, and wait for the lender to approve the changes before you can start the work. Depending on how complicated the changes are and how your lender reviews them, this process could take anywhere from one to three weeks.
From a project management point of view, I suggest that you spend a lot of time planning before you close on the loan. If you live with your renovation plans for a few weeks before you make them final, you'll be able to see any changes you might want to make. When the loan closes and work starts, treat your renovation plan as mostly set in stone unless something truly unexpected happens that makes you need to change it. In most cases, it's not worth the trouble to make changes to a renovation plan in the middle of the process because of the extra work and the limits on how much you can raise costs.
Yes, you can often combine HomeStyle loans with down payment help programs, but the rules for each program are different. This combination can be very helpful for first-time home buyers who want to buy a fixer-upper but don't have enough money saved up for the down payment and the costs of fixing it up.
Many state housing finance agencies give out grants or loans that don't have to be paid back as down payment help. These can be used with HomeStyle loans as long as the program allows conventional financing. Some programs only help with FHA, VA, or USDA loans, so you should check that the program you choose can also help with regular mortgages.
The HomeReady program, which I talked about before, works especially well with help with the down payment. HomeReady lets you make a down payment of as little as 3%, and many housing finance agencies set up their help programs to meet this 3% requirement. By adding HomeReady, HomeStyle, and down payment help together, you make it much easier for qualified buyers to buy a home.
Employer-assisted housing programs are another way to get help with your down payment, and they often work well with HomeStyle loans. If your employer offers housing assistance as a benefit, especially if they are a major corporation, university, or healthcare system, ask if you can use that help with renovation loans. As long as you're buying a primary residence, many employer programs are pretty flexible about the type of loan you can get.
Family gifts can also help you with your down payment for a HomeStyle loan, as long as you follow the normal Fannie Mae gift fund rules. The person giving the money must write a letter saying that the money is a gift and that they don't expect to get it back. Your lender will also need proof that the money was sent from the donor to you.
One problem with combining HomeStyle loans and down payment help is that the help usually gets added to the amount you owe on your home. For instance, if you're buying a $285,000 project and getting $14,250 in down payment help to meet your 5% requirement, your LTV is still 95% of the total project cost. The help lets you make the down payment without using up all of your savings, but it doesn't lower your LTV ratio or get rid of the need for PMI.
Make sure that all of your lender's and the organization that helps with your down payment's requirements are the same by working closely with both. Along with the requirements for your HomeStyle loan, some assistance programs have income limits, require home buyer education courses, or only allow certain types of properties.
Fannie Mae doesn't say how much you have to spend on renovations to get a HomeStyle loan, so you could technically use one for small improvements. In reality, though, HomeStyle loans are much more complicated than regular mortgages when it comes to checking contractors, reviewing renovation plans, getting specialized appraisals, managing draw schedules, and inspections.
Most lenders set their own minimum renovation amounts, which usually range from $15,000 to $30,000. This is because it doesn't make sense to process a HomeStyle loan for a $10,000 bathroom remodel when it would require more work. The lender's processing costs are the same whether you're remodeling for $20,000 or $100,000, so small amounts of remodeling don't make the extra work worth it.
HomeStyle loans make the most sense for borrowers when their renovation costs are high enough that other types of financing become too expensive or impractical. The HomeStyle loan lets you borrow seventy thousand dollars for a big kitchen remodel, new HVAC, and bathroom updates at regular mortgage rates instead of home equity loan rates or credit card rates. If you only need $8,000 for new floors and paint, though, a regular mortgage for the house plus a small personal loan or savings for the small changes is probably a better option.
When HomeStyle loans are worth it for you depends on your situation, but as a general rule, I think you should think about them when your renovation needs are more than $15,000 to $20,000. Unless you're combining several small projects into one big renovation that costs more than this range, the administrative complexity usually outweighs the benefits below this level.
Think of it this way: HomeStyle loans exist to solve a specific problem: they make it possible to buy homes that need a lot of work by combining the purchase and renovation into one mortgage with good rates. It's not necessary to use the tool if your property doesn't need a lot of work, even though it could be used for smaller projects.
Fact Checked