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Fannie Mae finances home and remodeling in one mortgage

Michele Lerner | Improvement Center Columnist | October 1, 2012

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Every homeowner has a wish list of renovation projects that could make their home more valuable, more efficient or simply more pleasant for daily life. Moving an item from the "to-do" list to the "done" list often takes cash, something in short supply for many families. Two loan options are available for homeowners and for buyers that can make a remodeling project easier to afford: an FHA 203(k) loan and a Fannie Mae HomeStyle Renovation mortgage. Both of these loan options allow borrowers to combine their remodeling and home financing costs into one loan.

A big advantage of these loans is that, instead of pulling cash from savings or racking up a jumbo-size credit card bill, you can pay off your renovation costs over the life of the loan. In addition, the mortgage interest paid on these loans is tax deductible.

Fannie Mae HomeStyle Renovation mortgage benefits

You can make almost any repair, renovation or home improvement that will add value to your property with this mortgage program, including luxury items such as an in-ground swimming pool, as long as the financed project is a permanent addition to the property.

While you must spend a minimum of $5,000 on your home improvement project, the maximum amount you can spend is up to 50 percent of the current appraised value of your property. In other words, if your home is valued at $200,000, you can spend as much as $100,000 on home improvements.

Unlike the FHA 203(k) loan program, the Fannie Mae HomeStyle Renovation mortgage is available not only to homeowners for their primary residence, but also to homeowners for a second home and to investors.

You can use this mortgage program to finance improvements to a condominium, a town house or a single family home.

Fannie Mae HomeStyle Renovation mortgage loan terms

To qualify for a Fannie Mae HomeStyle Renovation mortgage, you'll need to meet a lender's credit standards. While Fannie Mae says owner-occupants must have a minimum credit score of 660, many lenders will require a higher credit score for an approval. Borrowers with a credit score of 740 or higher will pay the lowest mortgage rates. If you are borrowing money for the renovation of a second home or for an investment property, your credit score must be 720 or higher.

Your qualification for the mortgage will be based on the full loan amount, including both the home financing portion of the loan and the repair costs. Fannie Mae says your maximum debt-to-income ratio must be 45 percent or less, but some lenders have a lower debt-to-income ratio requirement.

Fannie Mae's loan limits in 2012 are $417,000, so you won't be able to borrow more than that on a conforming loan. However, you may qualify for a jumbo loan, which is limited to $625,500 and carries a higher interest rate. For a jumbo loan, you'll need a credit score of 700 or higher.

You must have a minimum down payment or home equity of three percent for a conforming loan or five percent for a jumbo loan according to Fannie Mae, but many lenders may require ten percent or more for this loan program.

The Fannie Mae HomeStyle Renovation mortgage program requires you to work with a licensed, registered contractor.

Once your loan is in place, an escrow account will be established from which you can draw funds to pay the contractor as the work progresses. You'll need to make sure the entire project is completed within 12 months.

If you have good credit and 10 percent or more in home equity, the Fannie Mae HomeStyle Renovation mortgage could be right for your project.

Contact a mortgage lender to discuss your financing options for the home improvement project on the top of your to-do list.

About the Author

Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.