Your Guide to the HomeStyle Renovation Loan
If you are having trouble finding your perfect home in the perfect neighbor, the Homestyle renovation loan could be the perfect solution for you. Many homebuyers are finding it difficult to find a home that is move-in ready. Why not find an acceptable home in the perfect neighborhood that would enable you to create your own dream with the Homestyle renovation loan. You can choose your own wall colors, update the kitchen and baths, and replace the worn-out carpet, or add gleaming wood floors.
Real estate investors are always looking for new and better solutions to financing the next rental properties. Most rental properties take money, and often that means cash investors don’t have or don’t want to give up. There IS a solution to this problem. Whether you’re an investor who prefers to pay all cash for your rental properties, or whether you use hard money lending, there are other less expensive options that you should consider.
Home Buyers Guide to Buying A Fixer Upper
What is the HomeStyle Renovation Mortgage and How Does it Work?
The HomeStyle Renovation loan is a Fannie Mae (FNMA) loan that basically allows a home buyer or investor to purchase a property and include the renovation costs into the mortgage. It’s quite similar to a hard money loan, but the significant difference is that the loan is a permanent loan (15 or 30-year fixed) at significantly lower cost. Since the loan is FNMA backed, it’s going to conform more to the market interest rates and fees for a conventional mortgage.
Here is the most basic example to help you understand the Homestyle loan:
Sale Price: $100,000
Renovation Budget: $25,000
Total Investment Needed: $125,000
95% loan to value is allowed on primary residences and 80% LTV for single family residential rental properties, 30-Year Fixed Mortgage*
Primary residence: Loan Amount (95% of $125k): $118,750
Rental Property: Loan Amount (80% of $125k): $100,000
Many of the tradition guidelines that apply to conventional loans also apply to their HomeStyle Renovation product. One thing to keep in mind is that not all lenders are qualified to do a HomeStyle Renovation loan program.
The Homestyle Renovation Mortgage is used on single family houses, but there are exceptions allowed. These loans can be used on 2-4 family units, condos and other property types that are “permanently” attached.
The FNMA HomeStyle Renovation Mortgage Lending Process in Detail
First, call The Richard Woodward Team of Service First Mortgage for a pre-qualification at (214) 945-1066. This is essential, once you are prequalified then you can begin house hunting with a Realtor that understands the process. If you don’t know a qualified Realtor, Richard can refer one to you.
As mentioned, not all lenders or mortgage brokers are qualified or set up to provide the HomeStyle Renovation loan program. It takes quite a bit more staff and processes for the lender to be able to provide these type of loans.
Second, the HomeStyle Renovation mortgage process takes 45 and sometimes up to 60 days to close. Plan accordingly with your purchase contract. These are more intense than the standard, 30-day conventional mortgages, so make sure that you have the time and personal commitment to work the process. Expect hiccups! Your contractors must be approved by the lender so have them picked out and ready to go once you find a home. We will send you a packet of information that your general contractor must complete and return so we may verify the information and issue a contractor approval. Only one general contractor is allowed per loan file. All the subcontractors must work with the general contractor to get paid.
The important part of this process is to have a renovation contractor develop a Scope Of Work (SOW) with you. The contractor will also need to complete a contractor profile. These are required parts of the loan paperwork. The lender needs a SOW, also called the Scope Of Repairs (SOR), to know what you plan to do to the house and that those items will actually bring it to a livable condition. Here are some items that you will be required to provide to your lender:
* Scope of Work with itemized repair budget
* The cost of the renovation cannot exceed 50% of the appraised value of the property
* Copy of contractor’s license from the jurisdiction of the property if applicable
* Copy of contractor’s insurance (general liability and workman’s comp usually)
* Contractor profile form from Fannie Mae
* Copy of contract between you and your contractor
* Notification of work needing permits (can’t moonlight these; permit work must be permitted)
Restrictions: Not many. The property should need some repairs, at least enough to justify this process and a couple of extra costs. What can it need? Just about anything. Foundation repair, yes. Windows, yes. Doors, yes. Bathroom, yes. Kitchen, yes. Roof, yes. An addition onto the back of the house? Even for this, yes. Free-standing stove, no. Mini-blinds, no. (More on this later.)
Third, put a house under contract. Allow at least 45 days if your contractor is already approved and 60 days or longer if you have not selected a contractor. Negotiate the best price you can on the house that you want. Your Realtor will submit the offer and once accepted provide the contract to us so that we can get started on the mortgage process.
Most contracts permit a 10-day inspection period or other amount of time that is negotiated to have a professional inspection. We will require a HUD inspector to visit the property. The HUD inspector will determine any required repairs to the property and work with you and the contractor to review your plans for the repairs you wish to do. The HUD inspector will then put together a report that is used to finalize the budget and create a Feasibility study.
The validation of the SOW/SOR is done by the consultant. The HUD consultant will review the SOW/SOR while at the property to justify that this set of repairs will bring the property to a livable and safe condition. They will also validate the cost of each of the items being repaired in accordance with market prices. The consultant and/or the underwriter, under FNMA guidelines, WILL add a contingency budget of usually 10% of the total cost of the renovation and sometimes up to 20%. The contingency reserves are there to cover any cost over runs. The balance of the contingency budget will be applied back to the borrower’s loan balance if not used during the renovation process.
Fourth, you will need to provide your lender with documents.
These will simply entail the traditional documents needed for a conventional loan and a few other items related to the renovation.
Fifth, your hard part is done. It’s time to process the paperwork now but DO expect the underwriter to ask for additional items. Be responsive and quick to provide any requested documents to move the process along.
Some of the next steps include an appraisal that is ordered and managed by the lender. Rather than a traditional appraisal, they are going to appraise the property based upon “subject to repairs” or the “After Repaired Value”. This is important to the lender and to you in order to justify that the cost plus renovation do not exceed the value of the property you are purchasing.
Sixth, underwriting takes place.
Once all of the documents have been received for the loan, the lender will underwrite the loan for final approval. Additional questions are regularly made at this point, and then the loan is set for approval.
Seventh, you’re ready to close.
Once everything has been done with this process, which typically takes 45-60 days and sometimes longer, you are ready to close on the sale. The closing will take place at the title company indicated in the purchase contract. An escrow account is set aside with the renovation proceeds, usually with the lender. Instructions about the contractor draw requests are provided at closing. Once the contactor completes a predetermine construction phase they will be provided funds to complete the next stage of the construction.
Eighth, you are ready to begin renovations.
It’s up to you and/or your contractor to start the renovations as outlined. The lender will NOT give you starter funds for the renovation. Typically, the owner will need to provide the contractor with starter funds to fund materials and initial labor. Once formidable progress is completed on certain tasks of the SOW, a draw request can be made for reimbursement. Most renovation loans come with a limit of up to five draws.
A form is submitted to the lender, and an inspection is made by the HUD consultant who validated the SOW. The reimbursement process can take a few days on each draw, so be prepared. Continue this process to completion. Draw checks are written to the borrower and the contractor. Once the renovation is complete, the final draw will be released upon receipt of the following: a HomeStyle Completion Certificate, a Project Inspectors Final Report, and a Release of Lien and Title Update.
Ninth, congratulations — your house is renovated and ready to move into, or rent if originated as an investment property.
Using this process to purchase a home instead of a traditional turnkey properties typically yields a better equity position. The purpose of going through the renovation process on your own instead of having someone else do it is to save equity. If you can renovate the property to be worth $135,000 for the cost of $125,000, you just made $10,000 in equity. This is where our clients have shined.
You also may be eligible to use a renovation mortgage as a part of a refinance. Seek the expert advice of a qualified lender.