HomeStyle Loans: What You Need to Know
If you are looking to renovate or just refresh your house a little bit, HomeStyle loans might be the right thing for you. They are a type of mortgage that allows you to finance both the purchase of a home and the cost of renovations into one loan. This can be a great option if you are looking to buy a fixer-upper or if you need to make some updates to your current home. But the question is how do HomeStyle loans work, and who offers these renovation loans? In this article, we will explore all things HomeStyle loans offer, so you can decide if this financing option is the right one for you.
In case you are planning to buy a home that needs repair or renovation, a HomeStyle loan may be the perfect mortgage for you. With this loan, you can finance the purchase price of the property plus any necessary repairs and renovations, all with one convenient loan.
Lenders who offer HomeStyle loans will usually require a minimum credit score of 620 and a maximum debt-to-income ratio of 45%, but these requirements can vary depending on the lender. As with any mortgage loan, you will also need to have enough saved for a down payment (which is typically 20% of the purchase price).
Once you are ready to apply, the first step is to find a participating lender. Not all lenders offer HomeStyle loans. That’s why it’s important to shop around and compare your options. When you have found a participating lender, they will then help you complete the application process and provide guidance on what documentation you will need to provide.
After your application is complete, the lender will order an appraisal of the property to determine its value and make sure that the repairs or renovations you plan to make are feasible. If everything looks good, they will issue final approval and send you a closing disclosure detailing all the final terms and conditions of your loan.
At closing, you’ll need to bring money for your down payment as well as any closing costs. After everything is signed and finalized, renovation funds will be disbursed directly to your contractor.
What Is a HomeStyle Loan?
Now that we have covered some basics let’s see what is a HomeStyle loan. A HomeStyle loan is a single-close loan or a mortgage that can be used to finance the purchase of a home and pay for renovations. It is available as a fixed-rate or adjustable-rate mortgage, and you can choose between a 15- or 30-year term.
The great thing about HomeStyle loans is that you can borrow up to 95% of the value of the home (after factoring in the cost of renovations). The minimum loan amount is $50,000, and the maximum loan amount is $750,000.
Also, this type of loan is issued by Fannie Mae, which means that they are government-backed. You can also use this mortgage to renovate a property or to refinance the already existing mortgage with extra cash for home improvements.
How Do HomeStyle Loans Work?
If you have any plans to purchase a home that needs major repairs or extensive renovation, a HomeStyle loan may be the right mortgage for you. This type of loan is available from both Fannie Mae and Freddie Mac and can be used to buy or refinance an owner-occupied home, up to four units.
Like with any other type of loan, if you are looking to apply for a Fannie Mae HomeStyle loan, there are some requirements you will need to fulfill. The first thing is that you will need at least a 5% down payment and a credit score of 680 or higher. On top of that, you will also need to prove that you have the financial ability to repay the loan by providing documentation of your income and assets.
Once you are approved for the loan, you will then start work with your lender to select a contractor who will complete the renovations. The lender will release funds to the contractor as the work is being completed, and you won’t make any payments on the loan until the work is finished. When all of that is completed, you will start making your monthly payments on a HomeStyle loan.
Another thing to note is that this type of loan comes with a fixed or adjustable rate that can last between 15 to 30 years. Also, the renovations of your home must be completed in 12 months if you take out the mortgage and the lender monitors the work.
What Are the Requirements for HomeStyle Loans?
So far, we have discussed what the Fannie Mae HomeStyle loan is and what it can be used for. Let’s not take a look at the needed requirements for you to take out this mortgage.
This type of loan is available to both owner-occupants and investors who are looking to purchase or refinance a property. The loan can be used to finance renovations, repairs, or even new construction.
First and foremost, you must have good to excellent credit in order to qualify. Additionally, your debt-to-income ratio must be within acceptable limits. You will also need to have enough equity in your home to cover the down payment and any closing costs.
If you meet all of the needed requirements above, then you should definitely consider applying for a Fannie Mae HomeStyle loan. These loans can provide you with the needed funds to make any home improvements that you desire.
We do recommend talking to an expert before making any final decision. At the end of the, it’s crucial to be able to repay the loan back in time.
Advantages and Disadvantages of HomeStyle Loans
Whether you are looking to buy and fix up the house or you just want to make little home improvements, the conventional HomeStyle loan can be a great option for you. But you need to be aware that they do come with benefits and setbacks that you need to consider also. Here are some of them.
Advantages of HomeStyle loans:
- Lower interest rates
- Lower down payment
- Available for any type of renovation
- Can finance construction costs up to 75%
Disadvantages of HomeStyle loans:
- They are only available through Fannie Mae
- Renovations must be completed within 12 months of taking out the loan
- You need a very good credit score to be able to qualify for
- A lot of documentation needed
Advantages
HomeStyle loans are offered by Fannie Mae and allow borrowers to purchase and renovate a primary residence, secondary home, or investment property.
In comparison to other traditional types of mortgages, this type of loan tends to have lower interest rates and down payments. On top of that, you are not limited to just renovating one thing.
Another great benefit you can have with them is that they can cover up to 75% of the construction cost. This can save you money which you can later use for anything else.
Disadvantages
There are some disadvantages to HomeStyle loans that you should be aware of before you apply. First, this type of loan is available to people who have a good or excellent credit score.
Second, HomeStyle loans are only available through Fannie Mae-approved lenders, so borrowers may have limited options when it comes to finding a lender.
And finally, because these loans are used for home renovations, borrowers may face additional complications and delays if their contractor is not experienced in working with HomeStyle loans.
This is because all of the work when it comes to renovation has to be completed within 12 months of you taking out this loan.
How Much Can You Borrow With HomeStyle Loans?
The great thing about them is that with HomeStyle loans, you can borrow up to 97% of the value of the home as long as the home doesn’t exceed Fannie Mae’s maximum loan amount for the area.
The maximum loan amount for a single-family home is $484,350, and the maximum loan amount for a multi-family home is $726,525. So, if you are planning to make any major renovations to your home, you will need to get an estimate of the cost of the repairs from a contractor before you apply for a HomeStyle loan.
Once you know how much your renovations will cost, you can compare that to the maximum loan amounts and see how much money you will be able to borrow. Remember, with this type of loan; you can finance both the purchase price of the home and the cost of renovations all in one loan.
Alternatives to HomeStyle Loans
Although HomeStyle loans can be a very useful thing, they are available only to people who have a good credit score. Since not everyone has an excellent score, you can consider other alternatives to this type of loan. Here are some of them:
- Home equity loan
- HELOC loan
- FHA 203(k) loan
- VA rehab loan
- Personal loan
- Cash-out refinance
- Freddie Mac CHOICER renovation loan
All of these loans are a great way to get the needed funding to renovate your house, and you can get qualified for them even if you do not have so good credit score. Also, a lot of people usually choose between a HomeStyle loan vs. a 203(k) loan. You can always contact a financial advisor, who can help you find the best loan for yourself and also explain it to you more.
Final Thoughts
From time to time, our houses need a little refreshing here and there. Although home improvements and renovation don’t have to be big, they still can cost a lot of money.
A HomeStyle loan can be a perfect thing for you since it can provide you with the needed funding. Plus, they are issued through Fannie Mae, which means they are government-backed.
