May20

Fannie Mae Homestyle Renovation Loan – Step by Step Process

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Renovation BlueprintBy now you’ve probably heard about and have been reading up on Fannie Mae’s Homestyle Renovation Loan program. It’s a nifty little mini-construction loan. Released late in 2014 it was Fannie Mae’s answer to the FHA 203K loan – only it’s easier. Trust me I’ve done them and what a refreshing comparison. The Homestyle doesn’t have quite as many restrictions as the 203K such as loan amounts, etc. Have you been wanting to tear out that old bathroom, blow out that kitchen wall to open up space? Add that extra living room or bonus room, raise that ceiling or repair the roofing? Install that much needed outdoor patio with pool out by the lake? Found that perfect home in the location you really want to be in but it just doesn’t have the square footage you need or desire? Well now you can!  -Without any out of pocket money for the remodeling project.  It’s all packaged into one refinance or purchase loan!  Now that we’ve had some experience with this loan, I’d like to share some much needed info with you! Check out these simple steps on what it takes to get the Fannie Mae Homestyle Renovation Loan.

Step 1 Hire a Reliable General Contractor (GC): This cannot be stressed enough. Of course this is easier said than done. But you will want to interview a few GC’s and then make the best choice that suits your taste for the project and needs. Is he available? Meaning, does he spread himself too thin with new projects just to get more work? Will he do what he says? Does he have a history of completing the work on time based on what his past clients have stated? All these things play a key role on how smoothly your project will go. There will be a deadline of 6 months or less to complete the project from closing. The renovation department will decide how many months and a draw schedule depending on the size of the project. Once you’ve decided on a GC, he will need to give you a bid of everything you want in the upgrade and remodel- A breakdown of Materials, Labors and the Total cost. Underwriting will want to see it this way. So make sure the GC gives you a very thorough breakdown on company letterhead (.   I do get asked a lot about the homeowner doing the work themselves.  Per Fannie Mae’s website it does state that:

Borrower “Do-it-Yourself” Work:
Borrowers can perform the renovation work themselves at the lender’s discretion, provided that:
-The Do-It-Yourself financing does not exceed 10% of the as completed value. Note: Inspections are required for all work items that cost more than $5,000.
-The property is a one-unit owner-occupied home.
-The reimbursement is limited to the cost of materials or the cost of properly documented contract labor  equity may not be reimbursed.

However, lenders are allowed and have added what we call in the industry an “Overlay”. An overlay  means that the lender has instituted an extra layer of protection for themselves. Even though Fannie Mae allows the borrower to do the repairs and remodel themselves, the lender will not. So unless the lender ever removes this overlay, the borrower cannot do the work themselves and they must hire a licensed general contractor. Even though I can understand why a homeowner or investor would want to do the repairs themselves to save some money, it would simply be too much risk to the lender to let the repairs be done without a license. A GC’s license will be the leverage a lender needs to make sure everything is done properly, on time and up to code. If not, the GC’s license will be in jeopardy. Can you imagine all the sloppy work that could be done out there with those who are not properly licensed? So, it does make sense.

Step 2 Feasibility Test: This is a close tie with Step 1. Even though it’s important (and much more fun) to put together the project with the GC, any project that exceeds $15,000 in repairs will require a Feasibility Test.  If total repair costs are less than $15,000, then you will not need a test.  This is what I refer to as a “glorified home inspection” completed by a HUD Consultant. Costs for this type of inspection will run you anywhere from $750 – $1,000 depending on your area of Florida and the size of the project.  And well worth it.  Here in Tampa, FL that’s roughly the cost. It may seem like a substantial cost up front, but in comparison it can save you thousands in potential repairs not accounted for up front. It’s a very small price to make sure the project is done right.  A feasibility test is very important because whatever the HUD consultant finds (if anything) that needs to be repaired such as electrical, plumbing or foundational, it will need to be included in the repair/remodel bid. These are things that if not caught in time and later in the process, it may knock you out of your budget! And we want to spare you that inconvenience. We waited, unfortunately until about half way on our first few and luckily nothing major was discovered that hurt the process. But my team and I now know that it’s best to do up front. It’s not the sexy part of the project but highly necessary.  A good rule of thumb is don’t max out your budget and leave about a $5,000 buffer in case the feasibility test reveals any necessary repairs or unforeseen issue throughout the project as a whole.

Step 3 Get Home Under Contract: Some might debate that this could be Step 1. And by now you may have already gotten a home for purchase under contract. If not, then now is the time. And for those of you who already own the home, this is great for a refinance and in a lot of ways better than a cash-out refinance because Homestyle allows for a higher loan to value. I’ll talk more about that in a different step. When getting a home under contract, your realtor will hopefully be aware of what you were trying to do in the beginning. Maybe they even suggested it to you. But they will probably suggest, and I concur that you allow a contract for 45-60 days. Don’t let that scare you! Depending on how much you have planned already or if you’re starting from complete scratch, we’d rather have the time and not need it. In most cases I’ve found that these type of loans don’t really take that much more time compared to regular purchase without the remodel. It is more work up front. But once we have everything in, it doesn’t take that long to get out of underwriting, the renovation approval department and into a scheduled closing with the title company. But I do suggest at least a 45 day contract. If things go really smooth and we can close sooner, then we will. But that at least gives us enough time. Especially with the new 3 day rescission period for purchases starting on August 1, 2015.

Step 4 Underwriting & Renovation Department Approval: To date, we’ve probably spent two to three weeks to get to this step. Now we’ve really got some steam and your file is just a couple weeks away from approval and a Clear to Close Status! From here the underwriter initially looks at your file and approves as would any other file for purchase or refinance. Once he/she is done with that it gets passed on to the Homestyle Renovation Department so they can approve the project. Along with the HUD inspector’s recommendations, the Reno Dept will determine how many draws the GC will receive from the project and how many months it will be required to complete. One thing to note: The GC (If not already on the lender’s GC approved list) will need to be approved at the same time the file is submitted to underwriting. So far this has been a fairly simple process with no extra delays. They will do background checks, license check and few other behind the scenes steps. But it will be required for the GC to become approved in order to fund the loan. So let your GC know they will have to submit a Contractor Profile Report Form, Copy of License and a W9. Nothing too extreme. If you’re having trouble finding a good GC, you can choose from an already approved GC. Here is a list for every state. Ours would be for FL only.

Step 5 Clear to Close Status: Now the fun begins! Once the loan has been cleared to close, you can sit back and watch the GC get the work done. Hopefully everything will go smoothly. Now the home that you just purchased OR already owned will get a much needed makeover, added square footage and more importantly your own personal stamp! Nothing beats a home you live in when you designed it!

Notable Mentions & Other Highlights of The Fannie Mae Homestyle Loan: Using the Homestyle to refinance a home that you already own will allow you all the way up to 95% Loan to Value. A simple cash-out refi will only let you go up to 80%. So if you need every penny, Homestyle is the way to go. Homestyle also allows you to roll some extra months into the escrowed amount for repairs to allow you to pay the mortgage payment if the project is too extensive and you will not be living in the home while remodel is taking place. This can be a tremendously helpful feature! Especially, if you are paying rent or mortgage staying somewhere else. The Homestyle Loan isn’t much different in rates comparison to a regular Conventional Purchase or Refinance. For generic numbers: If a regular conventional purchase was at 4% interest rate, then a Homestyle would more than likely be at 4.5% Of course Loan to Value and borrower’s credit scores do play an important role. But not much different. Homestyle will let you install or conduct repairs on an existing pool. The FHA 203K will not. Plus, Homestyle will allow up to 50% of the projects After Repaired Value (ARV) to the home! Homestyle Renovation Loan can be used for any type of property except manufactured homes. It can be used for a primary residence, second home or investment properties. Of course, down payment requirement range from 5% for primary all the way to 20% for investment properties. So it’s fairly flexible. It is not a suitable loan program for fix and flip projects. Remember, Experience is key. And if you’re contemplating the Homestyle Renovation loan, you’ll want an experienced loan consultant in your corner. Hope you enjoyed this blog and let’s get to renovating!

Green House Mortgage is a full service home loan origination entity in Tampa, FL and servicing the state throughout – We can do loans anywhere in Florida! If you have any questions regarding this article or simply need mortgage advice please call 813-732-3155 or email us at info@ghmortgage.com. We are dedicated to giving you the best mortgage consultation available. Green House Mortgage – It Pays to Go Green!

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