House under renovation
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Homeowners planning a renovation might consider a home equity loan or line of credit to help finance the projects. But those aren’t the only options.

What about someone looking to buy a new home that happens to need some extra TLC or remodeling?

In both these scenarios, there’s another loan specifically designed to cover home improvements on a new or refinanced property: Fannie Mae’s HomeStyle Renovation mortgage.

What is a HomeStyle loan?

A HomeStyle Renovation mortgage is a government-backed loan that allows qualified borrowers to add extra money for remodeling or improvements to an initial home purchase mortgage or a mortgage refinancing.

The loans are meant to offer a “convenient and economical” way for homeowners, homebuyers and investors to finance minor or moderate home improvements through a single-close first mortgage or refinance—rather than having to apply for a second mortgage, home equity line of credit or other costlier finance options, according to Fannie Mae. The loan amount is based on the future “as-completed” value of the property once the repairs or renovations are performed, rather than its existing present value.

Key benefits of a HomeStyle loan

One of the most appealing aspects of these loans is that the renovations they enable could help create equity in the property almost immediately. For example, HomeStyle Renovation mortgages can help pay for design upgrades and energy efficiency improvements—covering architect, contractor and inspector costs, permits and more.

The loans are available as 15- or 30-year fixed-rate mortgages, or as adjustable rate mortgages. The program’s benefits include flexibility and low cost—down payments can be as small as 5 percent, and borrowers avoid fees and closing costs associated with taking out a second mortgage. HomeStyle loans also offer generally lower interest rates (5 to 7 percent) than might be found with an equity loan or line of credit.

Not all banks are qualified to offer HomeStyle mortgages: Lenders must be approved by Fannie Mae, meeting certain financial and operational requirements and having at least two years’ experience originating and servicing renovation mortgages in the past five years.

What are the requirements?

Properties eligible for HomeStyle loans include primary residences of one to four units, one-unit second homes and single-unit investment dwellings such as co-ops or condos. Ineligible properties include manufactured or mobile homes.

Eligible borrowers could be individual homebuyers, investors, nonprofit organizations or local government agencies. Nonprofits must provide added documentation to prove their ability to repay. Individuals should have a credit score of at least 640, with a 50 percent debt-to-income ratio.

HomeStyle loans require that any renovations be done by approved architects and contractors, who may be asked to provide necessary plans and proposals before the loan is approved. The aim is to ensure the home improvements are cost effective, and documentation helps lenders calculate the as-completed value of the property. Borrowers with single-unit, owner-occupied homes are allowed to do some work themselves if the lender allows it, as long as financing for the DIY portion of the work is less than 10 percent of the as-completed value.

When submitting plans to the lender, contractors must be specific about the project’s timeline. Renovations should be completed within six months of closing and energy improvements must be completed within 100 days. Once the work is finished, the lender will then hire an appraiser to inspect it and report back to Fannie Mae to certify completion before contractors are paid.