Work

How to Finance Your Home Renovation with HomeStyle

I’ve previously written about First Home Mortgage’s FHA renovation loan product, the 203k:

Found a Diamond in the Rough? Finance Your Home Purchase and Renovation Costs in an FHA 203k Loan

203k: Timeline and Troubleshooting

While this is a great product, if you are able to come up with a 5% down payment and have a minimum credit score of 660, the conventional version of this product, Fannie Mae’s Conforming HomeStyle Renovation Mortgage, may be a better option for you.  (I always say “may be” as each borrower’s situation should be reviewed independently to find the best mortgage product for his/her short and long-term financial goals.)

HomeStyle Renovation Loan Overview

Here’s an overview of the product from First Home Mortgage’s guidelines (our guidelines can change from day-to-day, so always contact me for the most up-to-date information):

  • 30 year fixed term only
  • Purchase or refinance
  • Minimum down payment of 5%
  • Minimum credit score of 660
  • Borrower may finance the costs of repairs, remodeling, or renovations into the purchase or rate/term refinance mortgage.
  • There are no required improvements or restrictions on the types of repairs allowed or a minimum dollar amount for the repairs.
  • Cost of renovation is limited to 50% of the “as completed” appraised value.
  • Repairs or improvements must be permanently affixed to the real property and add value to the property.
  • The repairs and improvements must meet any local codes and ordinances and the contractor must obtain all required permits prior to the start of work.
  • Renovation work must be completed within 6 months from date the mortgage loan is closed (exceptions may be considered on a case-by-case basis for larger renovation projects.

HomeStyle Renovation Consultant Requirements

An FHA-approved Renovation Consultant is required to prepare all plans and specifications for the renovation loan.  Here are more details on the consultants role in the renovation loan’s process:

  • The consultant can not be involved with the completion of the renovation project and is not an interested party to the transaction.
  • Plans and specifications should fully describe all of the work to be done and provide an indication of when various jobs or stages of completion will be scheduled (including both the start and completion dates).
  • The plans and specifications will reflect an overview of the entire project, details of the specific work, location, the quantities and quality of materials to be used in completing the project.
  • First Home Mortgage will use the plans and specifications to document and evaluate the quantity, quality, and cost of the renovation work that is to be done and to determine the amount of financing that will be available.
  • The plans and specifications must be provided to the appraiser for development of his/her opinion of the “as completed” value of the property.

HomeStyle Renovation Contractor Requirements

  • “Do It Yourself”/Self Help repairs are NOT permitted.
  • All renovation work must be performed by a registered, licensed and reputable contractor chosen by the borrower, subject to First Home Mortgage’s determination that the contractor is qualified, experienced, has all required and necessary credentials required by the state, is financially able to complete the renovation in the time allotted and agrees to indemnify the borrower’s for all damages and property losses caused by the contractor’s employees or subcontractors.
  • Contractor can NOT be an interested party to the transaction, AND can NOT be related to the borrower(s).
  • In addition, each contractor is required to sign the HomeStyle Renovation Draw Request Disclosure and HomeStyle Renovation “Important Notice Regarding Contingency Funds”.

What Can Be Included in the Renovation Costs?

  • Labor & Materials
  • Contingency reserves (see the next section for an explanation)
  • Consultant/Home Inspection and Inspection Fees (fee must be customary for the area) – inspections required for each release of renovation funds including final inspection from the original appraiser for certification of completion
  • Title update fee(s), including final title update at completion
  • Architectural/Engineering fees
  • Independent Consultant fees
  • Permits
  • Other fees (appropriate to the renovation project)
  • Up to 6 months of mortgage payments (only if the property can NOT be occupied during the renovation period)

What Is a Contingency Reserve?

  • An amount equal to 10% of the total costs of the repairs and renovation work that must be established and funded for all loan transactions to cover required unforeseen repairs or deficiencies that are discovered during the renovation.
  • Reserve may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation.
  • Unused contingency funds remaining after all of the renovation work has been completed and the certification of completion has been obtained may be handled as follows:
    • If financed, unused funds must be used to reduce the outstanding balance of the renovation mortgage
    • If received directly from the borrower, unused funds must be reimbursed to the borrower.
    • A borrower may, on a case-by-case basis, be able to use the remaining contingency reserve funds for making improvements or repairs that are permanently affixed to the property and add value (may not purchase personal property). This may only occur after the lender responsible for draw management has:
      • warranted that the work scheduled and described in the original plans and specifications was completed and the contingency reserve funds have already been reduced by any cost overruns; and
      • ensured that the contingency reserve funds that are to be used for additional improvements or repairs are actually used to improve the real property, are documented with paid receipts from the borrower’s own funds, and inspections of the additional work or installations are completed by the appraiser who prepared the “as completed” value appraisal report.

If you are interested in learning more about how the HomeStyle renovation at First Home Mortgage works for a purchase or refinance, feel free to contact me for more information.

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