Definition of the HomeStyle Loan and Examples
What is a HomeStyle Loan?
A HomeStyle loan is a mortgage loan program from Fannie Mae (FNMA) that offers a low-interest loan to purchase or refinance a property and make renovations on it. Buyers or homeowners can finance up to 75% of the expected value of the home after renovation through a Fannie Mae-approved lender.
How Does a HomeStyle Loan Work?
The HomeStyle loan allows you to take out a single loan to finance both the purchase and renovation. Alternatively, you can refinance the current mortgage to include the cost of the work.
The terms of these loans vary; they can include adjustable-rate loans and fixed-rate loans for 15 or 30 years. You can finance renovation costs up to 75% of the expected value of the home after the work is completed. Or, you can finance the purchase price plus the cost of renovations.
HomeStyle loans can be used for any improvement project within the existing structure of the home. This includes even luxury items like jacuzzis. They can also be combined with the HomeStyle Energy program. This program rewards you for upgrades that improve water or energy efficiency in your home.
Important: Not all lenders offer HomeStyle loans. Make sure the lender you are considering is approved for the program before proceeding.
What are the Advantages and Disadvantages of HomeStyle Loans?
Advantages
– Low-interest rates and low down payments: HomeStyle loans come with competitive interest rates and lower down payments compared to other types of loans.
– Freedom to use any contractor: You can use any contractor you want for the work. Just make sure they have the necessary state licenses.
– Potential positive feedback through the HomeStyle Energy program: Some energy-efficient upgrades are eligible for a $500 credit.
– Financing for substantial construction costs: Construction costs can amount to 75% of the expected value of the home after the project is complete, or the purchase price plus construction costs – whichever is less.
– Can be used for multi-unit properties and vacation homes: You can use these loans for vacation homes and investment properties, for both small and large projects.
– Can be used for any type of renovation: You do not have to be a primary resident. You can use these loans for vacation homes and investment properties, for both small and large projects.
– Covers inspection, consulting, title costs, and more.
Disadvantages
– Structural changes to the home are not allowed.
– Only available through Fannie Mae lenders.
– Work must be completed within 12 months of loan closing.
– There are restrictions on the work you can do yourself.
– Requires more documentation than a traditional mortgage.
– You must have a strong enough credit score to qualify.
HomeStyle Loan vs. 203(k)
HomeStyle loans are not the only option for those looking for financing for home improvements at the time of purchase (or for those looking for refinancing). The Federal Housing Administration (FHA) 203(k) loan program is another popular option. These loans share many similarities; for example, both have a high loan-to-value ratio and a comprehensive purchase and renovation structure. But there are some key differences.
Fannie Mae HomeStyle Loan
– Often more flexible regarding ownership.
– Often more flexible regarding borrower qualifications.
– Higher credit score threshold (620).
– Can be used for multi-unit properties and vacation homes.
– Lower loan costs.
– Mortgage insurance drops at 22% loan-to-value.
Loan203(k) from the Federal Housing Administration
– Often more flexible regarding ownership.
– Often more flexible regarding borrower qualifications.
– Lower credit score threshold (580).
– Must be the primary residence.
– Generally higher loan costs.
– Mortgage insurance is permanent.
Key Takeaways
The HomeStyle loan from Fannie Mae offers a purchase or refinance option for a home with renovation costs included in the loan. This can be a good option as they tend to have lower interest rates and down payments compared to other loans. The HomeStyle loan provides flexibility in the type of property and renovations you can use it for.
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Source: https://www.thebalancemoney.com/what-is-a-homestyle-loan-4686019
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