Fannie Mae’s HomeStyle Renovation program is an essential option for many borrowers.
Sometimes a borrower wants to purchase a home that needs significant upgrades, repairs, and improvements, but most mortgage products only provide enough funding for the purchase of the property itself. The borrower would be left with little to no money for upgrades, which means, in many cases, that the home is not purchased.
To fill this need, Fannie Mae has created the HomeStyle Renovation program, which provides loans that cover both the cost of the home as well as the cost of upgrades.
To improve the program and make it more accessible, Fannie Mae recently announced changes to their Selling Guide. Having a basic understanding of these changes will help you get the most from your HomeStyle Renovation loan.
Important Updates to Fannie Mae’s HomeStyle Renovation Program
If a seller or servicer chooses to deliver all HomeStyle Renovation loans directly to Fannie Mae after renovation is complete, they no longer have to be approved for HomeStyle Renovation. If they deliver the loans before the renovation is complete, approval will still be required.
LTV Ratios Increased
This is an important change that will impact borrowers. The maximum loan-to-value ratio for HomeStyle Renovation loans is now 97% for fixed-rate mortgages. This includes single-unit, principle residence, purchase, and limited cash-out refinancing, which all need to be underwritten by Desktop Underwriter, the mortgage-writing program used by Fannie Mae and other organizations.
Manually-written loans, however, have loan-to-value limits of 95.1% to 97%, depending on the details of the transaction.
Manufactured Homes Now Eligible
Previously, you could not use Fannie Mae’s HomeStyle Renovation to update or enhance a manufactured home. Now, however, this program is available, but the changes cannot be structural. The same loan-to-value requirements apply, and the total funds are limited to 50% of the “as-completed” value or $50,000, whichever is smaller.
Loan Limits Increased
The total limits on HomeStyle Renovation loans have been increased. The limit on eligible renovations are now 75% of one of two numbers:
- Acquisition plus renovation costs
- The “as-completed” appraised value
Essentially, you will look at both of these number; whichever is smaller will be your starting point. You then take 75% of that number to determine your loan limit.
Projects No Longer Have to Add Value
Previously, the borrower had to essentially demonstrate that the project would add value. Whether you were renovating a kitchen or repairing a roof, the lender would need some sort of evidence that the project would enhance the value of the home. This requirement is now dropped.
HomeStyle Loans Can Be Used to Create New Units
If you want to add a whole new unit to your property, you can now use HomeStyle Renovation loans to complete the task. Previously, this was not an option.
Material Draws May Be Made
Lenders may now release material draws at the beginning of the project for the expressed purpose of acquiring materials that are identified in the project estimate. This can be done for up to 50% of the total up-front materials cost, and a portion can be used to pay for design, fees, permits, and other expenses.
Licensed Contractors Must Be Used When Required
This is really a clarification more than a new update. Fannie Mae included a note that licensed contractors must be used whenever required by state or local regulations. If your specific type of renovation requires licensing, the contractor you choose will need to show proof of their licenses.
Inspections are Required
Before escrow draws are made, all required inspections must be completed to ensure the work is being completed properly. Inspectors will usually compare the work to the plans and specifications to ensure everything is lining up properly.
Larger Reserves Can Be Requested
This update essentially gives lenders the right to request higher amounts of reserves if they see fit. Lenders can now increase reserve requirements by 15% if they determine that a larger reserve is needed. This is basically up to the discretion of the lender.
Future Representation Available
If a HomeStyle Renovation loan is delivered before the project is complete, it will be eligible for future representation. It will warrant relief under Versions 1 and 2 of the specific framework used to complete these transactions. The relief must be completed and the recourse will need to be removed before the renovation is eligible for relief.
Recourse Removal Updated to Include Payment History
There are specific requirements outlined by Fannie Mae that outline how to remove recourse when the renovation is complete. These requirements have been updated and now include a payment history from the borrower.
Old Forms Retired, New Forms Required
Previously, the HomeStyle Completion Certificate, which was Form 1036, was required. That form has now been phased out and the Appraisal Update and/or Completion Report (Form 1004D) is now required. The new documents will outline the completion renovation work and will need to be submitted when requesting removal or recourse.
New Requirements for Extended Projects
If you have a project that is extended over a lengthy period of time, there are new requirements that will impact your loan. These requirements impact two different situations. The first is when construction cannot be completed within 12 months of delivery. The second is when improvements are not being completed as planned. Speak with your lender for details on how the regulations impact your project and loan.
Servicing Transfers are Completed When Construction is Complete
To ensure that renovation escrows and completion of the projects are properly managed, Fannie Mae is now restricting the service of transfers until the renovation is complete.
Providing the Right Support for HomeStyle Renovation Loans
Want more information about HomeStyle Renovation loans? Contact the team at San Diego Purchase Loans and we’ll help you understand the advantages of using Fannie Mae’s program to purchase a home and make upgrades.
With a dedication to service and common-sense underwriting, we can help you get the best possible terms on a high-quality HomeStyle Renovation loan.
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