Home-Style Renovation Loan?

Question

Ok, some I’m in the process of buying a duplex from my father in the Woodbridge area of NJ. Needs a ton of major work that I’m trying to tie into the loan. So yes, I’ll have the rehab and mortgage all in one. The loaner I have called it a “home-style renovation Loan.” He explained to me its similar to a 203k loan your just able to do more? I wasn’t really understanding what the more was, maybe someone is familiar with this loan can help me out? Also looking for contractors that are certified to do these loans in the area.

Steve Furst · Answer

Hi @Christopher Balint - great question. The Fannie Mae Homestyle Renovation loan is exactly what you describe, a loan that combines the purchase price or existing mortgage with a construction loan for renovations. In my experience, this is used on owner-occupied residential properties (up to 4 units) although I am uncertain if this same product can be used on investment property.

The way the loan product works is that you'll have your contractor draw-up plans and a cost estimate for the repairs. Then, you'll submit this, along with contractor information to your loan officer. They will approve your contractor prior to issuing the new loan. Once the approval process is complete, the rehab funds will work on a draw basis. You, along with your contractor can choose the number of draws, but typically fewer is better - the reason being that someone from the mortgage company may have to come inspect progress before each draw request is processed. Usually 2-3 will do the trick, to both protect you and keep your contractor motivated to get the work complete quickly, to obtain the next installment payment.

In terms of contractor certification, from my recollection, the mortgage company runs an assessment based on the contractors license number (ROC #), as well as a supplemental search which includes things like a BBB check on their business. There may be some other qualification involved, but generally your contractor will work directly with the mortgage company to become qualified, so there is little you need to do in this regard.

The 'more' you're referring to is simply flexibility of the loan product. It is one of the most favorable for you as the owner/investor, and essentially protects you throughout the process. Because it is backed by Fannie Mae, lenders are more willing to provide these loans than others, thereby charging a lower rate relative to other 'riskier' products.

My experience in this area comes from utilizing this product on a home we renovated last year. I hope this help, but if there are any other questions please let me know and I'll help answer the best I can.

Steve Furst · Answer

@Christopher Balint happy to help - also, remember that your contractor doesn't have to be pre-certified to do a FMHSR loan. Likely, even if they've been certified before, your lender will need to re-certify them. So, just look for any contractor whom you might otherwise wish to do business with based on the basics (ie: they are reliable, come with good recommendations, have a good BBB score, no ROC issues, etc.) and it is likely they'll qualify with your lender just fine.

Best of luck to you!

Christopher Balint · Answer

This absolutely helped and cleared up my lack of knowledge on this type of loan. Thank you Steve, now I’m just on my next step is looking for contractor that is certified to do these types of loans.