The Home Loan That Includes a Renovation Allowance
The FNMA HomeStyle conventional mortgage allows a buyer to purchase a home that needs renovations and include them in the financing. This facilitates the purchase of the home and the renovations in one loan rather than getting a separate second mortgage or home equity line of credit.
The combination of these loans should save closing costs as well as interest rates which would typically be higher on a home improvement loan.
The borrower will need to have an itemized, written bid from a contractor covering the scope of the improvements. Any type of renovation or repair is eligible if it is a permanent part of the property. Improvements must be completed within 12 months from the date the mortgage loan is delivered.
- 15 and 30-year fixed rate and eligible adjustable rate loans are available.
- Typical FNMA down payments are available starting as low as 3% for a one-unit principal residence to 25% for three and four-unit principal residence and one-unit investment properties.
- Borrower must choose his or her own contractor to perform the renovation.
- Lender must review the contractor hired by the borrower to determine if they are adequately 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.
- 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 contractor, 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)
Up to 50% of the renovation funds may be advanced for the cost of materials after the closing of the loan.
This mortgage does have a provision for the borrower to do a portion of the work themselves if it doesn't exceed 10% of the total project and it must pass inspection on completion just as the contractor's work.
It is recommended that borrowers thoroughly research this program before they commit to a loan. For detailed information, see FNMA HomeStyle Renovation Mortgage and Selling Guide Announcement SEL-2017-02. It is important to work with a mortgage officer who is familiar with these loans who can guide you through the process.
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