Community Developments Investments (February 2018)
Fannie Mae's HomeStyle Renovation Mortgage Program
Sarah Parada, Director, Corporate Marketing and Communications, Fannie Mae
John Kissinger of Dayton, Ohio, purchased a foreclosed home in February 2016 for $55,000. The house was affordable but clearly a fixer-upper. "The house was in our price range," said Kissinger. "But we needed to strip and repair the roof, repair the garage door, and re-carpet." So when he closed on the home, he rolled the cost of rehabilitation, $23,000, into a single Fannie Mae HomeStyle Renovation mortgage.
HomeStyle Renovation mortgages allow for financing of home improvements up to 50 percent of the as-completed value of the improved property in a purchase or refinance transaction. This type of financing can be less costly for borrowers than taking out a second mortgage or home equity line of credit, since it combines the cost of the home and renovation into one single-cost mortgage.
HomeStyle Renovation can be used by individual home buyers, investors, nonprofit organizations, and local government agencies.
"If we were to sell now, we would have some equity," Kissinger said. "It's a really nice home, and we plan to stay here a long time." He said the as-completed estimated value of his home was
Mini Economic-Stimulus Packages
Bank-owned (also called real estate owned) homes are for sale in many parts of the country, and can be more affordable than non-bank-owned properties, according to Realtytrac.
Dustin Swigart, a loan originator in Cincinnati who closed 30 HomeStyle Renovation loans last year, sees this as a niche for serving low- to moderate-income customers. "With renovation loans, the buyer can do light to moderate repairs, such as flooring, roofing, electrical, and plumbing repairs, all the way up to major renovations like room additions and foundation repairs," he said.
Plus, lenders can use HomeStyle Renovation to save deals that have repair contingencies, such as repairing a wall or ceiling. "We can do all of this while still being affordable," Swigart said. "That's what makes these loans so appealing."
Swigart works with local real estate professionals, contractors, and nonprofit organizations like Cincinnati's Over-the-Rhine (OTR) Advancing Derelict and Obsolete Properties through Transfer (ADOPT), a nonprofit group that works to restore housing to productive use as part of community revitalization efforts.
"I'm able to personally help in the revitalization of the communities I serve by educating project partners on the benefits of this type of financing," he said.
OTR ADOPT uses HomeStyle Renovation loans for purchasing vacant properties to demolish and rebuild affordable housing. Those homes are sold to new owner-occupants.
Swigart likens the projects to mini economic-stimulus packages for the community: "You have the sale of the home, the purchase of new materials for the renovation, and the hiring of contractors. Plus, we're moving bank-owned inventory, which helps bring up home values by updating an aged housing stock."
Love the House, Hate the Kitchen
According to Zillow, 11 percent of all U.S. homes were constructed before 1950. Those homes could use some updating to accommodate the tastes and expectations of today's buyers.
"You have the ‘Love the house, hate the kitchen' scenario, ‘We need three bathrooms,' or whatever it may be," Swigart said. "Buyers like the idea of being able to roll improvements into the purchase cost and closing with some equity." Equity-at-close figures cover a broad range, and he said he's seen consumers close with $10,000 to $90,000.
With a HomeStyle Renovation loan, borrowers can do repairs or renovate a kitchen, add a bedroom to accommodate a growing family or relatives requiring care, or modify the home to age in place.
But renovation loans are not without challenges. They can be tricky to underwrite and take longer to close. And unlike credit lines, renovation loans require lenders to administer the renovation funds by escrowing the funds and issuing draws once periodic and final inspections confirm the planned work is on track or has been completed.
Still, Swigart said he finds these loans, and working with borrowers who use them, highly rewarding. "I've made renovations my focus and have gotten really good at them by systemizing the process," he explains, "so we end up closing in 45 days or less in most cases."
His 2017 goal was to fund 50 HomeStyle Renovation loans. "It's a product I really believe in."
Learn more about HomeStyle Renovation at FannieMae.com.
To originate HomeStyle Renovation loans, lenders must
- receive prior approval from Fannie Mae,
- have two years of direct experience originating and servicing renovation mortgages within the past five years, and
- meet certain financial capacity and operational requirements..
HomeStyle Renovation Facts-at-a-Glance
|Special lender approval required?||Yes|
|Lender recourse required to deliver the loan before completion of the renovation work?||Yes|
|Buyer must pay off existing debt?||Not applicable|
|Basic weatherization and water efficiency||Permitted|
|Loan level price adjustment credit||$500 if energy improvements are part of the renovation|
|Financing improvements||Up to 50% of the as-completed appraised value|
|Escrow requirements||Escrow required|
|Property eligibility||1- to 4-unit principal residence, 1-unit second homes, or 1-unit investment properties, including condos and co-ops|
Source: Fannie Mae.
This publication is part of:
Collection: Community Developments Investments
Letty Ann Shapiro
On the cover
Before-and-after image of a home in New Orleans rehabilitated by Redmellon Restoration & Development, a mission-driven real estate development company.
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.