Have you ever tried to get a loan for a fixer-upper? Most lenders won’t approve loans to purchase homes that need major renovation. What about getting a loan to remodel your existing home or rental property? You could try a home improvement loan, but second lien interest rates can make that option unattractive, and second lien lenders will not touch investment properties.
The solution may be the Fannie Mae Homestyle Renovation program. The program allows 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 and engineering and permit fees, may be included in the loan.
This is a conventional loan program with conventional interest rates. Rates are about 1/2% higher than standard conventional rates.
For your primary residence, you may borrow up to 95% of the property value. For a home purchase, the property value is the lesser of the “as-completed” appraised value and the sum of the purchase price and total renovation costs. For a refinance, replace the purchase price with the payoff of your existing liens. You may borrow up to 80% for a second home and up to 75% for a rental property.
Total renovation costs included in the loan, including any contingency reserve, eligible soft costs, and payment reserve, cannot exceed 50% of the estimated “as-completed” value of the home. Soft costs are limited to 3% of loan amount or $5,000. A payment reserve is allowed only if the home will be uninhabitable during renovation.
The program can be attractive for remodeling an existing home even if you’re satisfied with your current mortgage. Interest rates are historically low, and it’s unlikely you can find a home improvement loan that will result in a lower combined payment than the payment from refinancing using the Homestyle Renovation program. (Use our “Compare Options” calculator on our Web site to check the numbers yourself.)
The program does have one significant restriction. A licensed contractor must perform the work. You cannot use a renovation loan to do your own remodeling. If you want to do it yourself, you need to consider a home improvement loan or a Texas equity (cash-out refinance) loan. Renovation must be completed in 6 months, and you cannot use the program to complete a previously started renovation project.