A house is under renovation construction work

Fannie Mae and Freddie Mac offer alternative loan options to fund major renovations or even the purchase of a fixer-upper. The Fannie Mae Homestyle loan allows families to borrow based on the improved value of the home. The Freddie Mac Choice Renovation loan will enable buyers to both (1) purchase a home and (2) renovate it in a single mortgage.

Fannie Mae Homestyle Loan

The Fannie Mae Homestyle loan allows families to borrow funds based on the improved value of the property, meaning that the loan can cover most renovation costs. When combined with the current market’s low-interest rates, this is among the best mortgage options to fund major renovations. The Homestyle loan can be funded with down payments as low as five% (but this will require private mortgage insurance, usually less than the FHA 203k loan PMI).

Homestyle loans are more flexible than FHA 203k. For example, these loans can be used to fund renovations at primary, vacation, and rental properties. In general, there are few restrictions on the type of improvements this loan can finance and provides higher limits.  However, in turn, they require lower debt-to-income ratios and higher credit scores to qualify.

Freddie Mac Choice Renovation Mortgage

The Choice Renovation mortgage is a flexible loan option for buyers and current homeowners. It can be used to purchase fixer-uppers and fund the renovation in a single loan. The current housing market is flooded with too many buyers and not enough supply; therefore, it is getting harder and harder to find a turn-key-ready home. The Choice Renovation mortgage allows borrowers to purchase a fixer-upper because the renovations can be funded in the same loan as the purchase.

Moreover, the Choice Renovation mortgage can be used to fund renovations for existing home buyers. For example, it can be used to fund an accessory dwelling unit (or “Granny flat”) and to fund resiliency upgrades. For instance, storm shutters, surge barriers, retaining walls, and improvements to the foundation.

Other Loan Options

  1. Cash-Out Refinance: The borrower refinances a new mortgage and uses the excess cash to fund renovations.
  2. Home Equity Loan: This is a second mortgage that is borrowed against the increased equity in the home. The HEL is used for large one-time purchases.
  3. Home Equity Line of Credit: The HELOC borrows like the HEL but works like credit and can be used for several long-term projects.