What is a HomeStyle® Renovation Loan?
HomeStyle® Renovation loans allow home buyers to purchase properties and include costs for home improvement. They also allow homeowners to refinance existing properties and include costs for home improvement.
There are no required improvements, nor is there a minimum dollar amount for renovations. The maximum home improvement costs that may be financed is 75% of the lesser of the acquisition cost of a property (purchase price plus total renovation costs) or the “as completed” value of the property.
Fannie Mae® does not require the use of a Consultant to provide a Feasibility Study to ensure your project is feasible, but one may be required by your lender.
A Consultant’s Feasibility Study is required under the following circumstances:
- Hard costs total $75,000 or more (except in the case of pool installation when pool installation is the only work being financed); or
- Structural improvements are being made; or
- Contractor is related to or has a business relationship with any party to the transaction.
What properties are eligible for a HomeStyle® Renovation Loan?
HomeStyle® Renovation Loan eligible properties include:
- 1-4 units, owner-occupied
- 1 unit second homes
- Historical Properties (require approval for repairs from governing historical society)
- Manufactured homes (non-structural improvements only)
- Modular homes
- Planned Unit Developments (“PUD”)
- Townhome
- Warrantable condos (Fannie Mae®-approved and non-structural improvements only)
What improvements are allowed with a HomeStyle® Renovation Loan?
You can choose which repairs you would like to finance, but it is important to note that all appraiser-noted deficiencies and repairs must be addressed.
Eligible Improvements
There are no required improvements, nor is there a minimum dollar amount for renovations.
Generally, improvements should be permanently affixed to the real property (either dwelling or land), with the exception of certain appliances installed with kitchen and utility room remodels. You may use HomeStyle® Renovation to purchase appliances as part of an overall remodeling project that includes substantial changes or upgrades to the rooms in which the appliances are placed.
HomeStyle® Renovation may be used to complete the final work on a newly built home when the home is at least 90% complete. The remaining improvements must be related to completing non-structural items the original builder was unable to finish. Such work may include the installation of buyer-selected items such as flooring, cabinets, kitchen appliances, fixtures, and trim.
HomeStyle® Renovation may be used to construct various outdoor buildings and structures when allowed by local zoning regulations. These buildings or structures must be in compliance with any applicable building codes for the local area. Examples of acceptable structures include but are not limited to, accessory units, garages, recreation rooms, and swimming pools.
Ineligible Improvements
- Complete tear-down and reconstruction of a dwelling
- Raising a home (i.e. above a floodplain)
- Any renovations that will take longer than twelve (12) months to complete
- For purchases, any renovation that exceeds 75% the lesser of the acquisition costs (i.e., the purchase price plus total renovation costs) or “as completed” appraised value
- For refinances, any renovation that exceeds 75% of the “as completed” appraised value
What are the HomeStyle® Renovation Loan Appraisal Requirements?
- As-Is Appraisal: As-is appraisals are never required for HomeStyle® Renovation loans.
- After-Improved Appraisal: An after-improved appraisal is required for every HomeStyle® Renovation loan.
What are the HomeStyle® Renovation Loan Financeable Renovation Costs?
- A contingency reserve will be funded to cover unforeseen repairs that are discovered during renovation. The amount of contingency will vary between 10%-15% of the bid amount. Contingency reserves are required and typically financed in the loan amount (i.e., Financed Contingency). Alternatively, you may bring funds to closing to fund the contingency reserves; however, any assets required to fund the contingency reserves must be documented and verified above the amount required for down payment and reserves (i.e., Borrower-Funded Contingency)
- Hard costs (i.e., labor and materials from the contractor’s bid)
- Architectural fees
- Engineering fees
- Consultant fees (if/when applicable)
- Draw inspection fees
- Title update fees
- Permit costs
- Mortgage Payment Reserves not to exceed six (6) months’ principal, interest, property taxes, and homeowner’s insurance payments, depending on the length of time the property will be uninhabitable during renovation
- Draw Management Fees
Other Highlights of the HomeStyle® Renovation Loan
- First-time homebuyers may put down as little as 3% of the purchase price plus total renovation costs. Other buyers may put down as little as 5% of the purchase price plus total renovation costs
- Homeownership education is required if the loan-to-value (“LTV”) or combined loan-to-value (CLTV) ratio exceeds 95% for a purchase transaction and all borrowers are first-time homebuyers
- Homeowners who are refinancing a loan owned by Fannie Mae® may finance up to 97% LTV. If the existing loan is not owned by Fannie Mae®, the maximum LTV allowed is 95%
- Mortgage insurance is required when LTV exceeds 80%
- Your contractor’s credentials will be vetted. Any contractor hired will have to provide proof of licensing (if required), a Certificate of Liability Insurance, Worker’s Compensation (if required), any specialty certifications required (e.g., lead-based paint, mold, radon, asbestos), and a signed IRS W-9 Form
- Your contractor’s bid has to meet certain requirements such as being on contractor letterhead, naming you as the client, identifying the property where the work will take place, a full description and the location of all work being performed, a labor and materials breakdown per line item, permits and their associated costs, accurate tally of all sub-totals and the grand total, start and completion dates, and number of draws needed. If the property will be uninhabitable during renovation, the contractor should indicate so and let us know how long the property will be uninhabitable
- You may be able to perform some of the work yourself if the property is a 1-unit and will be your primary residence. When allowed, Do-It-Yourself (“DIY”) improvements may not represent more than 10% of the “as completed” value of the property. To find out whether or not you would be allowed to perform work, contact me
- Gifts are allowed on purchases
- HomeStyle® Renovation loans may be combined with HomeStyle® Energy or HomeReady® loans. When combined with HomeStyle® Energy, an energy report may be required
- All permits should be pulled immediately after loan closing, work should commence within thirty (30) days’ of loan closing, work should not cease for any thirty (30) day period, and must be completed within twelve (12) months of loan closing
Draw Process of the HomeStyle® Renovation Loan
Allowable Disbursements at Loan Closing: Items that may be disbursed at the closing table include:
- Architectural Fees
- Engineering Fees
- Consultant Fee (if/when applicable)
- Permit costs (permits must be obtained before work commences)
- Draw Management Fee
- Materials draw up to 50% of the total upfront material costs. A portion of this 50% may be used to pay expenses associated with architect fees, design, and permits. The materials draw is strictly used for materials and is not considered a down payment or mobilization deposit. A materials draw should only be completed for items that are required to initiate the project and/or for items that must be special ordered. One of the following is required as proof of request for materials draw: 1) General Contractor to indicate on the bid what materials they are requesting funds for; 2) General Contractor to submit letter of explanation indicating what material funds are being requested; or 3) Diamond Residential Mortgage Corporation’s HomeStyle® Materials Disbursement Form, signed by the General Contractor. You should understand and agree to the materials funds being disbursed to the General Contractor and the General Contractor must not use issued materials funds for anything other than the items indicated
Remaining Draws Process: All other financeable improvement costs and fees will be deposited in the renovation escrow account and disbursed as described below:
- Inspections must occur before escrow draws are made to ensure work is being completed in accordance with plans and specifications
- Funds are released to you and General Contractor only when any given renovation work has been completed
- General Contractor to identify number of draws needed, payable upon completion of work
- A ten percent (10%) holdback will apply to all progress, or interim, draws
- Final draw will be paid-in-full and will include all previously withheld ten percent (10%) holdbacks, along with any outstanding contingency requests or change orders
- Appraiser inspects property to identify the percentage of work complete to date for each draw request. Appraiser must complete final inspection
- Checks will be made payable to you and contractor (i.e., dual-party checks) unless you grant us permission to issue payments directly to your contractor via ACH
There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.
Below is a high-level overview of the renovation loans Diamond Residential Mortgage Corporation offers. For more information, explore FAQs and Blog.
Keys To Success:
- Inquire early! If you attempt to place an offer on a property that is listed for sale without a pre-qualification letter, your offer may be rejected and you may miss a window of opportunity. It is best to secure financing before you are too far into the buying process.
- Make sure your contractor is on board with the contractor qualifications, bid requirements, and draw process required for your loan type.
- If a Consultant is involved, meet together at the property with the contractor, so all parties can finalize the scope of work together.
- Provide requested paperwork quickly to meet contract deadlines. Time lost on the front end of a deal oftentimes cannot be made up on the back end of the deal to hit closing deadlines.
- Be decisive! Decide on the details of your renovation project early and resist the temptation to make changes throughout the loan process. Wavering during the process can cause delays with your closing. Feel confident in pushing forward with the decisions you make at the onset of the transaction. That’s not to say you can’t make changes along the way, but making those changes mid-stream will likely cause delays.
