What is a HomeStyle loan, and can it pay for renovations?

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What is a HomeStyle loan?

The Fannie Mae HomeStyle Renovation loan is a government-backed mortgage that provides funds to remodel and repair a house. The loan can be in the form of a purchase mortgage or the refinance of a current mortgage with extra cash for improvements.

A HomeStyle loan can offer a convenient, economical way for homeowners, homebuyers and real estate investors to finance home improvements through a single first mortgage or refinance. With this type of loan, the borrower doesn’t have to take out a second mortgage, a home equity loan, home equity line of credit (HELOC) or some other potentially more expensive method of financing.

A HomeStyle renovation loan allows someone who falls in love with a fixer-upper, for example, to buy the place and get cash to do the renovations, all in one loan. Likewise, homeowners who want to upgrade the house they’re living in can refinance their mortgage and take out funds for improvements.

How a HomeStyle loan works

Fannie Mae HomeStyle loans are available only through Fannie Mae-approved lenders, and the amount is limited to 75 percent of the “as-completed” appraised value of the property once the repairs or renovations are finished, rather than its existing, pre-renovation value. This helps homeowners who don’t have a lot of home equity to borrow against.

The loan can be used for a primary residence, vacation home or investment property. It comes with a fixed or adjustable rate and terms of 15 years or 30 years. The cash payout for renovations is not disbursed to the lender; instead, the money is held in escrow and must be used solely for the renovation.

All renovations must also be permanently attached to the property, and add value to it. The renovations must be completed within 12 months of getting the mortgage, and the lender must monitor the job and have all the paperwork that supports the project.

HomeStyle loan requirements and rules

What properties are eligible?

Primary residences of one to four units, one-unit second homes and single-unit investment dwellings, such as co-ops or condos, are all candidates for Fannie Mae HomeStyle loans. Manufactured homes are eligible, too, but renovations are capped at 50 percent of the “as-completed” appraised value.

Who can apply?

Individual homebuyers, investors, nonprofit organizations and local government agencies can apply for a HomeStyle renovation loan. Nonprofits must provide added documentation to prove their ability to repay.

What are the credit score requirements?

Borrowers should have a credit score of at least 620 in order to be eligible for a HomeStyle loan. However, if your debt load is higher, you’ll likely need a higher score to compensate.

How much debt can you have?

Your debt-to-income (DTI) ratio plays a critical role in a lender’s evaluation of your finances. Essentially, the lender needs to know that you can pay your other debts — such as your car loan, student loans or credit cards — and still pay back this new loan. For a HomeStyle loan, you’ll want a DTI ratio no higher than 45 percent — but if it’s 36 percent or less, you’re in much better shape.

How much will you need to put down?

The down payment requirements for a HomeStyle loan depend on the type of residence you’re repairing or remodeling. If it’s a single-unit home that you’ll live in (also known as your “primary” or “principal” residence), your down payment can be as low as 3 percent with a fixed-rate mortgage or 5 percent with an adjustable-rate mortgage.

  • Manufactured home: 5 percent (10 percent if it’s a second home)
  • Two-unit principal residence: 15 percent
  • Three- or four-unit principal residence: 25 percent
  • One-unit second home: 10 percent

Can you get help with the down payment?

Provided that the home will be your principal residence, you might be able to get some help coming up with the money for the down payment through Fannie Mae’s Community Seconds initiative. This is a second mortgage, so you’ll owe more money, but it’s a convenient option if you won’t have enough liquid cash to cover the down payment or the closing costs.

Who else needs to be involved in the process?

Fannie Mae HomeStyle loans require that renovations be done by approved architects and contractors, who may be asked to provide 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.

When submitting plans to the lender, contractors must be specific about the project’s timeline. Once the work is finished, the lender will hire an appraiser to inspect the home and certify completion before contractors are paid.

Can you do the work yourself?

Borrowers with single-unit, owner-occupied homes are allowed to do some work themselves if the lender allows it, and as long as financing for the DIY portion of the work is less than 10 percent of the as-completed value. Keep in mind, though, that the HomeStyle loan is generally not designed for DIY projects.

HomeStyle loan pros and cons

One of the most appealing aspects of a HomeStyle loan is that it can help homeowners grow the equity in their property almost immediately. For example, you can use it to landscape your property to boost its curb appeal. Because the loan is backed by the government, however, one of the drawbacks is more paperwork and red tape.

Overall, though, the pros of HomeStyle Renovation loans tend to outweigh the cons:

Pros

  • Low down payment requirement
  • Lower interest rate than home equity loans, HELOCs or personal loans
  • Combines purchase or refinance, plus renovation funds, into one loan with one closing and one monthly payment
  • Can be used for primary residence, vacation home or investment property (as long as the project adds value to the property)
  • Can be used to make so-called “luxury” improvements, such as adding a swimming pool or hot tub
  • Can be used to upgrade single-family homes, four-unit homes, condos and manufactured homes
  • Enables homeowner to build equity fast

Cons

  • Stricter credit score and DTI standards
  • May take longer to close than a conventional mortgage
  • Not all lenders offer HomeStyle mortgages

HomeStyle loan vs. other home renovation loans

There are other loan products that can be used to make significant improvements to a home, as well. The best home renovation loan for your situation depends on factors such as your credit rating, how much equity you have in your home, your income and debt load and the type of improvements you want to make. Your other home renovation loan options might include:

FannieMae’s HomeStyle program is very similar to Freddie Mac’s CHOICERenovation loan, which launched in 2019. An FHA 203(k) loan also offers some cost advantages. If you’re looking for a home renovation loan option, you will generally find more favorable terms and interest rates with one of these government-backed options versus personal loans, credit cards or home equity loans. Other loan options also may have shorter repayment periods, making them harder to repay or suppressing how much you’re able to borrow.

In addition, unlike home equity loans and HELOCs, which are based on how much equity you have in your home before you do improvement projects, the HomeStyle loan limit is based on a percentage of the value of your home after the improvements are made.

Learn more:

Written by
Libby Wells
Contributing writer
Libby Wells is a contributor covering banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications.
Edited by
Mortgage editor
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