Improve your home and your bottom line

Posted by  on Jan 10, 2013

Many homeowners are aware of the option of an FHA 203k loan which allows borrowers to include the cost of home improvements in their mortgage loan. However, changes to the FHA mortgage program, such as raising the mortgage insurance rates for all borrowers, have made these loans more costly and less appealing. Few borrowers want to pay higher monthly payments after a mortgage refinance, particularly when current mortgage rates are so low.

Another option available to borrowers with enough home equity is a Fannie Mae HomeStyle Renovation Mortgage. Similar to the FHA 203k loan, this loan program, available for both purchase loans and mortgage refinancing, allows borrowers to finance home improvements with their mortgage rather than taking out a home equity loan or line of credit.

HomeStyle Renovation mortgage requirements

The maximum loan-to-value that can be refinanced with a HomeStyle Renovation mortgage is 95 percent of your home's post-improvement value, although some lenders may have stricter requirements such as a loan-to-value of 90 percent.

This mortgage program requires that you spend a minimum of $5,000 improving your home. The maximum limit is 50 percent of your home's current value, such as $150,000 in improvements on a $300,000 home.

In addition to an appraisal of your home's current value and an estimate of the cost of your planned home improvements, mortgage brokers will review your credit, your income and assets, and your debt-to-income ratio before approving a loan.

While Fannie Mae has established a minimum credit score of 660 for this loan program, mortgage lenders may require a higher credit score for a loan approval. Borrowers with a credit score of 740 or above will pay the lowest mortgage rates.

According to Fannie Mae, the maximum debt-to-income ratio is 45 percent, but some mortgage lenders require a lower debt-to-income ratio.

Benefits of the HomeStyle Renovation mortgage

The Fannie Mae HomeStyle Renovation mortgage is available to borrowers for their primary residence as well as a second home or investment property. However, owners of second homes can borrow only up to 90 percent of the post-improvement home value and investors can borrow only up to 75 percent of the post-improvement home value. The interest paid on the mortgage is tax-deductible for most borrowers.

While FHA renovation loans have some restrictions as to the type of home improvement that can be made, the HomeStyle mortgage program allows you to finance even luxury items such as a swimming pool and hot tub. The only requirement is that the improvements must add to your home's value and be a permanent addition to your property. In addition, you will be required to work with a licensed contractor.

If you are interested in refinancing and renovating with one loan, you should consult with mortgage lenders experienced with the HomeStyle Renovation mortgage program as well as a contractor who meets Fannie Mae's requirements.

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