Selling Guide

Published August 29, 2017

B5-3.2-02: HomeStyle Renovation Mortgages: Loan and Borrower Eligibility (03/29/2016)

This topic contains information on HomeStyle Renovation mortgage loans and borrower eligibility requirements, including:

Renovation-Related Costs

Renovation-related costs that may be considered as part of the total renovation costs include:

  • property inspection fees;

  • costs and fees for the title update;

  • architectural and engineering fees;

  • independent consultant fees;

  • costs for required permits; and

  • other documented charges, such as fees for energy reports, appraisals, review of renovation plans, and fees charged for processing renovation draws.

Note: An amount for sweat equity may not be factored into the renovation costs.

Property Requirements

The security property for a HomeStyle Renovation mortgage must be

  • a one- to four-unit principal residence,

  • a one-unit second home, or

  • a one-unit investment property.

The security property for a HomeStyle Renovation mortgage may be a unit in an eligible PUD, condo, or co-op project. Manufactured homes are not permitted.

When the security property is a unit in a condo 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 condo or co-op unit must be limited to the interior of the unit, including the installation of fire walls in the attic.

HomeReady Eligibility

HomeReady mortgage loans are eligible in combination with HomeStyle Renovation; however, the more restrictive requirements of HomeReady or HomeStyle Renovation apply when these two products are combined on a loan. For example, a HomeReady HomeStyle Renovation mortgage must be a principal residence transaction, whereas standard HomeStyle Renovation permits second homes and investment properties.

Mortgage Terms

A HomeStyle Renovation mortgage may be either a fixed-rate mortgage or an ARM loan. The original principal amount of the mortgage may not exceed Fannie Mae’s maximum allowable mortgage amount for a conventional first mortgage.

Fannie Mae provides HomeStyle Renovation Maximum Mortgage Worksheet (Form 1035), to assist lenders in calculating the maximum loan amount. The cost of renovations is limited to 50% of the “as completed” appraised value of the property.

LTV Ratios

All of the applicable LTV, CLTV, and HCLTV ratios for HomeStyle Renovation mortgages can be found in the Eligibility Matrix.

The LTV ratio calculation differs based on the applicable transaction type.

  • For a purchase money transaction, the LTV ratio is determined by dividing the original loan amount by the lesser of the “as completed” appraised value of the property or the sum of the purchase price of the property and the total rehabilitation costs.

  • For a refinance transaction, the LTV ratio is determined by dividing the original loan amount by the “as completed” appraised value of the property.

Limited Cash-out Transactions

When a HomeStyle Renovation mortgage loan is originated as a limited cash-out refinance transaction, the mortgage amount may include the amount required to satisfy the existing first mortgage, the amount required to satisfy any outstanding subordinate mortgage liens that were used to acquire the property, closing costs, prepaids, points, and the total renovation costs, including allowable renovation-related costs for the home improvements up to the maximum permitted LTV and CLTV ratios.

However, the borrower may not obtain any other funds from the transaction, including those that are generally allowed for a limited cash-out refinance transaction. Excess funds, if any, after renovations are completed, may be applied to the loan balance as a curtailment or may be reimbursed to the borrower for the cost of actual supplies or additional renovations for which paid receipts are provided. The value of sweat equity may not be reimbursed.

Borrower Requirements

An individual home buyer or homeowner, a for-profit or nonprofit investor, or a local government agency that purchases existing dwellings for renovation is an eligible borrower for a HomeStyle Renovation mortgage.

When a nonprofit investor is the borrower, the lender must assess the nonprofit investor’s viability, by looking at its track record for raising funds for renovation, the background of its board members, a copy of the organization’s bylaws and purpose, a copy of the organization’s Internal Revenue Code Section 501(c)(3) statement, a copy of the organization’s latest IRS Form 990, and a copy of a board resolution authorizing the nonprofit to purchase and renovate the security property.

To ensure that the borrower understands all of the terms of a HomeStyle Renovation mortgage, the lender may use Fannie Mae’s HomeStyle Renovation Consumer Tips (Form 1204), as a checklist for the key facts that need to be disclosed to the borrower, and the borrower’s signature will serve as an acknowledgment of his or her understanding of these facts.

Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2016–03 March 29, 2016
Announcement SEL-2015–10 September 29, 2015
Announcement SEL-2015–09 August 25, 2015
Announcement SEL-2013–06 August 20, 2013
Announcement SEL-2010–15 December 1, 2010
Announcement SEL-2010–09 June 30, 2010