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Loan Guidelines - Conventional Rehab

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.

Renovation 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, and you cannot use the program for renovation already in progress.

These are standard underwriting guidelines for conventional renovation mortgages. They are valid only for primary residences and 2nd homes. 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

Occupancy Property Type Credit Score Loan-to-Value Combined
1 unit 700 95% 95%
680 80% 95%
2 units 680 75% 75%
2nd Home 1-unit 680 80% N/A

Minimum credit score

Loan-to-Value Credit Score
> 80% 700
<= 80% 680

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.

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 renovation. Contingency reserves must be deposited in an escrow account controlled by the lender to cover unforeseen problems.

Eligible soft costs include architectural fees, engineering fees, and permit fees and are limited to three percent (3%) of loan amount or $5,000.

A reserve for payments during the renovation period is allowed only if the home will be uninhabitable during renovation.

Property value

Transaction Value
Purchase Value is the lesser of: 1) the sum of the "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, costs of improvements, contingency costs (if financed), eligible soft costs, interest reserve, and closing costs. Cash out is not allowed. You cannot refinance a Texas Equity loan with this program.

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
> 90% 3%
> 75% to 90% 6%
<= 75% 9%

Mortgage insurance

Mortgage insurance requirements are based on the loan-to-value ratio calculated using the after-improved value of the property or the cost base, whichever is less. All loans above 80% loan-to-value (except loans on some bank-owned properties) require mortgage insurance coverage according to the following guidelines:

Loan Term Loan-to-Value Coverage
> 20 years > 90% 30%
> 85% to 90% 25%
>80% to 85% 12%
<= 20 years > 90% 25%
> 85% to 90% 12%
>80% to 85% 6%

The mortgage insurance premium is based on the required "Coverage." For each coverage amount, the mortgage insurance companies charge a different percentage of the loan amount, and this percentage may vary by company and over time. This premium is added to your monthly mortgage payment.

Minimum cash reserves

Occupancy Property Type Loan-to-Value Reserves
1 unit > 80% 2 months PITI
<= 80% None
2 to 4 units All 6 months PITI for the subject property when rental income from the other units is used for qualifying
2nd Home All All 2 months PITI for the subject property plus 2 months reserves for each additional financed 2nd home or investment property

These are standard guidelines, and they may be raised or lowered by computer-based underwriting programs based on your financial situation and the transaction characteristics.

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- and 2-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 renovation. 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. The number of properties generally is not considered if you are financing (purchase or refinance) your primary residence.