HomeStyle Renovation Mortgage

FANNIE MAE

HomeStyle® Renovation Mortgage

Finances purchase and renovation in a single mortgage

BACKGROUND AND PURPOSE

A healthy housing market includes homes at vari-

ous levels of quality, including less expensive “starter

homes” that help low- and moderate-income house-

holds become homeowners and start building equity.

Frequently, starter homes are older and have deferred

maintenance that drives down the price. Access to

affordable credit that covers not just the purchase

price but also the cost of renovations is essential for

the continued viability of starter homes as a strategy to

promote homeownership.

The HomeStyle® Renovation (HSR) Mortgage permits

borrowers to include nancing for home improvements

in a purchase or renance transaction on existing

homes. The HSR Mortgage provides a convenient way

for borrowers to make renovations, repairs, or improve-

ments totaling up to 75 percent of the as-completed

appraised value of the property with a rst mortgage,

rather than a second mortgage, home equity line

of credit, or other more costly nancing method.

Eligible borrowers include individual homebuyers,

investors, nonprot organizations, and local govern-

ment agencies.

BORROWER CRITERIA

Income limits: This program has no income limits.

Credit: The borrower’s credit score inuences the loan

parameters. The minimum credit score is 620. Fannie

Mae uses trended data in its credit risk assessment

including those loans submitted through Desktop

Underwriter®. Trended credit data provides expanded

information on a borrower’s revolving account credit

history including whether the borrower pays off the

balance each month or makes the minimum pay-

ment due, and whether the borrower exceeds the

credit limit.

PROGRAM NAME

HomeStyle® Renovation Mortgage

AGENCY

Fannie Mae

EXPIRATION DATE

Not Applicable

APPLICATIONS

https://www.fanniemae.com/content/guide_form/1000a.pdf

WEB LINK

https://www.fanniemae.com/content/guide/selling/b5/3.2/02.html

CONTACT

INFORMATION

[email protected] (ask for a call-back in your email)

APPLICATION PERIOD

Continuous

GEOGRAPHIC SCOPE

National

111 | FDIC | Affordable Mortgage Lending Guide

First-time homebuyers: First-time homeowner status confers no benet.

Occupancy and ownership of other properties: A borrower may be

nancing no more than four properties, including a primary residence.

This program may be used for a primary residence, second home, or

investment property.

Special populations: Nonprots, for-prots, and government agencies

are eligible borrowers. Nonprots must provide information on their

track records with this type of work.

Special assistance for persons with disabilities: Funds may be used to

outt a home for use by a person with a disability.

Property type: The property may be a one- to four-unit primary resi-

dence, a one-unit second home, or a one-unit investment property with

each having separate loan-to-value (LTV) limits. Fee simple ownership,

co-ops, condominiums, and planned unit developments are allowed.

Manufactured housing is allowed, but the repairs, renovations, or

improvements are capped at 50 percent of the as-completed appraised

value. When the security property is a unit in a condominium or co-op

project, the project must be one for which the proposed renovation

work is permissible under the bylaws of the homeowners’ association

or co-op corporation or one for which the homeowners’ association or

co-op corporation has given written approval for the renovation work.

The renovation work for a condominium or co-op unit must be limited to

the interior of the unit.

Renovation or repair requirements: Any type of renovation or repair is

eligible, as long as it is permanently afxed to the property and adds

value. Renovations should be completed within 12 months from the

date that the mortgage loan is delivered.

LOAN CRITERIA

Loan limits: FHFA publishes Fannie Mae’s conforming loan limits annu-

ally. See Resources for a link to the current limits.

Loan-to-value limits: The maximum allowable LTV is 97 percent for a

one-unit primary residence unless combined with HomeReady. A com-

bined LTV of up to 105 percent is allowed with a Community Seconds®

mortgage for purchase transactions. For properties underwritten manu-

ally, the LTV is determined by credit score and other factors. Cost of

renovations is limited to 75 percent of the as-completed value of the

property; manufactured housing is limited to 50 percent of the as-

completed value. The borrower may not receive cash back at closing in

any amount.

A Community Seconds® mortgage is a subordinate mortgage that is used in connection with a rst

mortgage delivered to Fannie Mae. Fannie Mae does not purchase Community Seconds, but it does provide

eligibility requirements for the subordinate Community Seconds product. See fact sheet at

https://www.fanniemae.com/content/fact_sheet/community-seconds-fact-sheet.pdf.

POTENTIAL BENEFITS

The HomeStyle

Renovation

Mortgage program attracts new

and existing homeowners who

want to invest in and improve

their property in a way that may

lead to an appreciation in value.

Improvements benefit com

munity banks because of the

associated economic stability or

growth in the areas they serve.

Compared to the HomeStyle

Renovation Mortgage program,

conventional improvement loans

may have higher interest rates

with shorter repayment terms.

The competitive terms of this

program help lenders do more

volume in improvement loans

and attract borrowers who are

interested in this product.

POTENTIAL CHALLENGES

Special approval is required to

deliver HomeStyle

Renovation

loans to Fannie Mae. Lenders

must have a way to access the

program, whether through

direct sales or a correspondent

arrangement, as discussed in

the introduction to this section.

Depending on the arrangement,

community banks may need to

acquire or develop new exper

tise and infrastructure in order

to participate.

Lenders may not sell or transfer

servicing until the renovation

work is complete.

FDIC | Affordable Mortgage Lending Guide | 112

ALLOWABLE RENOVATION/REPAIRS COSTS:

Renovations must be permanently affixed and add

value to the property. Sweat equity is not an allow-

able cost. Allowable costs include the following:

• Contract labor and materials.

• Property inspection, title update, and permit fees.

• Architectural, engineering, and other

consultant fees.

• Other documented charges, such as fees for

energy reports, appraisals, review of renovation

plans, and fees charged for processing renova-

tion draws.

LENDER RENOVATION OVERSIGHT:

• The lender may not sell or transfer servicing until

renovation work is complete.

• The lender must review the contractor hired by

the borrower to determine if he or she is ade-

quately qualified and experienced for the work

being performed. The Contractor Profile Report

(Form 1202) can be used to assist the lender in

making this determination.

Adjustable-rate mortgages: ARMs are allowed, but

they must conform to Fannie Mae’s ARM requirements

(see Resources).

Homeownership counseling: Homeownership counsel-

ing is not required.

Loan-level price adjustments: Loan-level price adjust-

ments (LLPAs) are risk-based pricing adjustments that

apply at the time of delivery only. The standard Fannie

Mae LLPAs apply. When the mortgage is used to

nance energy-related improvements, the lender may

be eligible for an LLPA credit of $250.

Mortgage insurance: The borrower must have hazard

insurance in place to cover the estimated as-completed

value of the home after renovation. Mortgage insur-

ance, if required based on LTV, must be in place before

• Borrowers must have a construction contract

with their contractor. Fannie Mae has a model

Construction Contract (Form 3734) that may

be used to document the construction contract

between the borrower and the contractor.

• Plans and specifications must be prepared by

a registered, licensed, or certified general con-

tractor, renovation consultant, or architect. The

plans and specifications should fully describe

all work to be done and provide an indication of

when various jobs or stages of completion will

be scheduled (including both the start and job

completion dates).

• For one-unit owner-occupied homes, borrowers

may perform repairs themselves, but financing

of these repairs may not exceed 10 percent of the

as-completed value.

• Inspections are required for all work items that

cost more than $5,000.

• The reimbursement is limited to the cost of

materials or the cost of properly documented

contract labor (sweat equity may not

be reimbursed).

closing, and coverage is based on the estimated value

of the home after renovation.

Debt-to-income ratio: The debt-to-income (DTI) ratio

cannot exceed 45 percent. In the event that the bor-

rower has student loan debt, if the payment amount is

provided on the credit report, that amount can be used

for qualifying purposes. If the credit report does not

identify a payment amount, the lender can use either

1 percent of the outstanding student loan balance, or

a calculated payment that will fully amortize the loan

based on documented loan repayment terms.

Renance: Limited cash-out renance is a valid use

of this product, but cash may only be used to per-

form renovations; no cash may be disbursed to the

borrower, unlike other Fannie Mae limited cash-out

113 | FDIC | Affordable Mortgage Lending Guide

renances. The lender must disburse all remaining

funds to the borrower through one of two methods:

1. reduce the principal balance, or

2. make additional permanent, value-adding changes

to the property.

Reserves: Up to 12 months of reserves are required

depending on transaction type, credit score, LTV, and

number of units in the property.

ADDITIONAL INFORMATION

Approval: Special approval is required to deliver

HomeStyle® Renovation Mortgage loans to Fannie Mae.

Lenders must already be approved by Fannie Mae.

The lender must have two years of direct experience

originating and servicing renovation mortgages within

the last ve years. The lender must also have strong

operational controls and sufcient nancial capacity to

cover the lender’s recourse obligations during renova-

tion. Fannie Mae provides a Contractor Prole Report

(see resources) to ensure that the lender has sufcient

information to determine that a contractor is qualied.

The lender must set up and hold an interest-bearing

custodial renovation fund account. An as-completed

appraisal must be obtained. Renovation work must be

completed no later than 12 months from the date the

mortgage loan is delivered. The lender is responsible

for monitoring the completion of the renovation work

and managing disbursement of the funds.

Training: Fannie Mae offers a 30-minute online course

on underwriting, servicing, and delivering HomeStyle®

Renovation Mortgages.

Workow: Lenders must review plans and manage

renovation work throughout the process. In the prepa-

ratory phase, the borrower works with the contractor

to submit work plans and specications to the lender.

The appraiser reviews the plans and specications,

and determines the as-completed value after improve-

ments. The lender then uses the Maximum Mortgage

Worksheet to determine the mortgage amount

(see Resources).

In the renovation phase, the loan is rst closed and

sold to Fannie Mae. Funds for renovation are placed in

a custodial account. The contractor begins work and

requests funding. The lender performs inspections to

conrm that the work is completed, and gets lien

waivers and title endorsements if required. The

lender funds draw requests with two-party checks or

direct funding.

Once construction is complete, the lender orders

a nal appraisal inspection, updates the title

policy, and obtains a signed completion certicate,

which the lender gives to Fannie Mae to have the

recourse removed.

Potential Benets

• The HomeStyle® Renovation Mortgage program

attracts new and existing homeowners who

want to invest in and improve their property in

a way that may lead to an appreciation in value.

Improvements benet community banks because

of the associated economic stability or growth in

the areas they serve.

• Compared to the HomeStyle® Renovation

Mortgage program, conventional improvement

loans may have higher interest rates with shorter

repayment terms. The competitive terms of

this program help lenders do more volume in

improvement loans and attract borrowers who

are interested in this product.

• A lender may deliver a HomeStyle® Renovation

Mortgage as soon as it is closed; the renova-

tion, repair, or rehabilitation does not need to

have been completed when the mortgage is

delivered. This eliminates the costs of holding

the mortgage in a portfolio until the renovation

is completed.

• A single closing mortgage (as opposed to one

mortgage for the home’s current value and one

for the renovation improvements) saves work

for lenders.

• The HomeStyle® Renovation program may allow

community banks to expand their customer base

in low- and moderate-income communities.

• Loans originated through the HomeStyle®

Renovation Mortgage program may receive

favorable consideration under the CRA,

depending on the geography or income of the

participating borrowers.

FDIC | Affordable Mortgage Lending Guide | 114

Potential Challenges

• Special approval is required to deliver HomeStyle®

Renovation loans to Fannie Mae. Lenders must

have a way to access the program, whether

through direct sales or a correspondent arrange-

ment, as discussed in the introduction to this

section. Depending on the arrangement, commu-

nity banks may need to acquire or develop new

expertise and infrastructure in order to participate.

• Lenders may not sell or transfer servicing until the

renovation work is complete.

• Fannie Mae has full recourse to the lender through-

out the renovation process. Fannie Mae may

require the lender to re-purchase the loan if the

borrower defaults before the work is completed,

or if the lender’s actions affect Fannie Mae’s abil-

ity to obtain clear title to the property. Therefore,

lenders retain substantial risk until the renovation

is complete.

• Lenders must monitor the renovation progress,

which requires expertise in areas such as construc-

tion draws and contractor management. The lender

must maintain a copy of all the documentation that

supports the renovation work, plans, and specica-

tions, as-completed appraisal, renovation contract,

renovation loan agreement, certicate of comple-

tion, title insurance endorsements or updates, and

so on, in the individual mortgage le.

Similar Programs

• FHA 203(k) Rehabilitation Mortgage Insurance

• Freddie Mac Construction Conversion and

Renovation Mortgage

115 | FDIC | Affordable Mortgage Lending Guide

RESOURCES

Direct access to the following web links can be found at https://www.fdic.gov/mortgagelending.

Loan-to-value ratios

https://www.fanniemae.com/content/guide/selling/b5/3.2/02.html#LTV.20Ratios

Loan-level price adjustment

https://www.fanniemae.com/content/pricing/llpa-matrix.pdf

FHFA Conforming loan limits

http://www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx

Mortgage insurance pricing

https://www.fanniemae.com/content/guide/selling/b7/1/02.html

HomeStyle® Renovation Mortgage: Lender Eligibility (Selling Guide B5-3.2-01)

https://www.fanniemae.com/content/guide/selling/b5/3.2/01.html

Model construction contract (Form 3734)

https://www.fanniemae.com/content/legal_form/3734w.doc

Maximum Mortgage Worksheet (Form 1035)

https://www.fanniemae.com/content/guide_form/1035.pdf

Eligibility Matrix

https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

Appraisal update and/or Completion Report (Form 1004D)

https://www.fanniemae.com/content/guide_form/1004d.pdf

HomeStyle® Renovation Mortgages fact sheet

https://www.fanniemae.com/content/fact_sheet/homestyle-renovation-overview.pdf

Fannie Mae adjustable-rate mortgage requirements

https://www.fanniemae.com/content/guide/selling/b2/1.3/02.html

Community Seconds®

https://www.fanniemae.com/content/fact_sheet/community-seconds-fact-sheet.pdf

FDIC | Affordable Mortgage Lending Guide | 116