|
Loan Guidelines - Investment Rehab
The conventional renovation or "rehab" programs allow you to combine the purchase or refinance of a home with the costs to renovate or extensively remodel the property. Soft costs such as architectural services, engineering and permit fees may be financed.
Renovations must be completed by an approved, third-party contractor. You cannot use a renovation loan to do your own remodeling. You will make full, principal+interest payments both during and after the renovation. Renovation must be completed within 6 months of the closing date.
These are standard underwriting guidelines for conventional renovation mortgages. They are valid only for investment properties. Please see the glossary for definitions of the terms used in the guidelines. Note these guidelines are subject to change.
Maximum loan-to-value ratio
| Property Type |
Credit Score |
Loan-to-Value |
Combined
Loan-to-Value |
| 1-unit |
720 |
75% |
N/A |
Minimum credit score
| Employment |
Credit Score |
| Salaried |
720 |
| Self-employed |
740 |
Loan amounts
Fannie Mae sets the maximum loan amount for conventionl loans each year. Click here to view the limits on the Fannie Mae Web site. The minimum loan size is $50,000.
Funds for the renovation (contingency reserve, soft costs, and payment reserves) cannot exceed 50% of the estimated completed value of the home. Renovation cost must be documented by a fully executed third-party builder contract. Sweat equity is not allowed. Soft costs are limited to three percent (3%) of loan amount or $5,000.
A contingency reserve is required for a 2-unit, second home, or investment property. The reserve is equal to 10% of the cost of the renovations. Contingency reserves must be deposited in the renovation escrow account to cover unforeseen problems.
Property value
| Transaction |
Value |
| Purchase |
Value is the lesser of: 1) "as-is" purchase price, renovation costs, contingency costs (if financed), eligible soft costs and interest reserve or 2) the "as-completed" value of the home. |
| Refinance |
Value is based off appraised value, except that the loan amount may not exceed the total of liens on property plus costs of improvements and closing costs. Cash out is not allowed. |
Maximum debt ratios
| Loan-to-Value |
Total Debt Ratio |
| > 80% |
41% |
| <= 80% |
up to 55% |
For loans with loan-to-value ratios less than or equal to 80%, the maximum total debt ratio typically is determined by computer-based underwriting programs based on your financial situation and the transaction characteristics.
Maximum seller contributions
| Loan-to-Value |
Seller Contribution |
| <= 75% |
2% |
Minimum cash reserves
You must have six months PITI reserves for the subject property plus two months additional reserves on each financed second home or additional financed investment property.
The monetary value assigned to any asset used for reserves is the amount of cash you would receive if you liquidated the asset. For retirement accounts, 70% of your vested interest in the account may be used to meet reserve requirements.
Other guidelines
Acceptable property types
- 1-unit site-built homes
- Fannie Mae/Freddie Mac eligible condos
- Planned-unit-developments (PUDs)
- Modular homes
For PUDs and condominiums, the renovation project must be permissible under the bylaws of the owners association (or have written approval from the owners association). In addition, condominium renovation is limited to the interior of the unit (includes installation of an attic fire wall).
Draws and fees
At closing all funds for renovation will be escrowed in an interest earning account. The contractor will take draws against the account as the work is completed. Lenders typically base the number of draws (and the amount of the draw fee) on the dollar amount of the renovations. Lenders also may charge a fee for a final inspection of the work. After all renovation work is complete, any remaining funds in the renovation escrow account will be used to pay down the principal balance of the mortgage.
Maximum number of loans
While Fannie Mae guidelines allow you to finance up to ten residential properties, most lenders limit the number to four.
|
