Selling Guide

Published April 1, 2020

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B5-3.2-02, HomeStyle Renovation Mortgages: Loan and Borrower Eligibility (04/03/2019)

Introduction

This topic contains information on HomeStyle Renovation mortgages 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;

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

  • up to six months payments (PITIA) if a principal residence property cannot be occupied during renovation (see B5-3.2-04, HomeStyle Renovation Mortgages: Costs and Escrow Accounts for additional information).

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;

  • a one-unit investment property;

  • a manufactured home; or

  • a unit in an eligible PUD, condo, or co-op project.

When the security property is a unit in a condo or co-op project, the proposed renovation work must be permissible under the bylaws of the HOA or co-op corporation, or the HOA or co-op corporation must have 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.

The renovation of manufactured homes is allowed under HomeStyle Renovation provided the improvements do not include structural changes (such as adding a garage or other attached element). Eligible, non-structural improvements include, but are not limited to

  • improvements to kitchens and bathrooms;

  • installing energy efficiency heating and cooling systems;

  • changes to address mobility and aging in place requirements; and

  • installation of new windows, doors, siding, or roofing provided these changes do not alter the structure of the unit.


HomeReady Eligibility

HomeReady 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.

Exceptions:

  • For purchase transactions with LTV, CLTV, or HCLTV ratios 95.01 - 97% that combine HomeReady and HomeStyle Renovation, Fannie Mae is not requiring at least one borrower to be a first-time home buyer.

  • The mortgage insurance requirements for HomeReady apply when HomeReady and HomeStyle Renovation are combined. See B7-1-02, Mortgage Insurance Coverage Requirements, for details.


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 the HomeStyle Renovation Maximum Mortgage Worksheet (Form 1035), to assist lenders in calculating the maximum loan amount.

The maximum cost for renovations for various HomeStyle Renovation scenarios are described in the following table.

Transaction Type The cost of renovations must not exceed...
Purchase transaction 75% of the lesser of
  • the sum of the purchase price of the property plus renovation costs, or

  • the “as completed” appraised value of the property.

Refinance transaction 75% of the “as completed” appraised value of the property.
Manufactured homes the lesser of
  • $50,000 or

  • 50% of the “as completed” appraised value.


“Do It Yourself” Option

The “Do It Yourself” option is available for renovations made to one-unit properties by the borrower. This option is not available for manufactured homes. “Do It Yourself” renovations may not represent more than 10% of the “as completed” value of the property. The lender must review and approve the renovations in advance, and must inspect the completion of all items that cost more than $5,000.

A borrower may request reimbursement for his or her payments for the cost of materials or for the cost of properly documented contract labor, but not for the cost of his or her sweat equity (labor). When a borrower chooses this option, the lender must fully budget for the cost of labor and materials related to the renovation so that, should the borrower be unable to complete the work, a contractor can be hired to finish any of the “Do It Yourself” repairs.


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 renovation 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 loan 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, prepaid fees, and points; and

  • the total renovation costs, including allowable renovation-related costs for the home improvements up to the maximum permitted LTV and CLTV ratios.

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

Borrowers must meet the requirements of B2-2-01, General Borrower Eligibility Requirements. Nonprofit investors and local government agencies may be considered for eligibility on a negotiated basis. Lenders may contact their Fannie Mae customer account team for more information.

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 Articles

B5-3.2-01, HomeStyle Renovation Mortgages (02/27/2018)

IntroductionThis topic contains information on HomeStyle Renovation mortgages, including: Overview  Allowable Improvements  Lender...

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B5-3.2-03, HomeStyle Renovation Mortgages: Collateral Considerations (02/27/2018)

IntroductionThis topic contains information on HomeStyle Renovation mortgage collateral considerations, including: Appraisal Requirements  Energy...

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