FHA move over – Fannie offers a much better property renovation loan
Buyers often cringe at the thought of buying a “fixer home.” Some people just see dollar signs flying away as soon as they take possession.Others can’t even imagine tackling all the work, or living in a construction zone for months on end.
But buyers need to keep in mind what home flippers have known for years. The actual cost of renovations is usually considerably less than the increase in property value once renovations are completed.
If you’re one of those people who loves a specific neighborhood but can’t quite afford the homes, or you need special features in a home, but those features are hard to find or too expensive in your desired neighborhood, we have some great news for you.
Fannie Mae has recently introduced the Homestyle loan for those who qualify for conventional home financing. The Homestyle loan offers so much more than the more commonly offered FHA home renovation loan. It’s a single-close loan that enables borrowers to purchase a home that needs repairs and include the necessary funds for renovation in the loan balance. The loan amount is based on the lesser of the “as-completed” value of the home or the home purchase price plus cost of renovations.
But here’s where the Homestyle loan beats FHA. You can also use this financing to add a room, tear down walls to open up spaces, purchase new appliances, put in landscaping or site improvements, add a garage, finish decks, patios or basements, enhance accessibility for disabled persons, and so much more.
Any type of renovation or repair is eligible, as long as it is permanently affixed to the property and adds value. Renovations should be completed within a twelve-month period from the date the mortgage loan is delivered.
One-to four-unit principal residences, one-unit second homes, or one-unit investor properties including units in condos, co-ops, and PUDs. No manufactured housing.
Eligible borrowers include individual home buyers, investors, nonprofit organizations, or local government agencies. Borrowers must have satisfactory credit to qualify for a Fannie Mae loan (680 minimum credit score is a general guideline)
Down payment requirements
Fannie Mae currently requires a minimum of 5% down for owner occupied single unit residences but more on other types of properties and ownership. Read more about Fannie Mae guidelines regarding down payment requirements.
Most renovation work must be completed by a licensed contractor who must be approved by Fannie Mae prior to the close of the loan. The lender will “hold back” funds required for work and will disburse funds directly to the contractor when completed.
The final fantastic component of this type of mortgage is that, if you are an owner occupant, you can finance up to 6 months of your monthly mortgage payment to cover your the mortgage payments while the work is being done. This feature is available to everyone, but works best for renters since your rent payment is not added to your debt ratio when computing how much you are eligible to borrow.
While adding mortgage payments to your loan will increase your loan amount and your monthly payments, you are generally purchasing a lower priced home than it will be worth once renovations are completed. Remember you are very likely buying a “fixer” because of the lower price point than new or renovated homes usually sell for in any given neighborhood.
NOTE: Not all lenders offer this loan, or some may not offer all the features described above, so you may have to shop lenders to find the features you are looking for in your home renovation loan.