Editor’s note: Fannie Mae discontinued the HomePath program on October 6, 2014. Buyers must have had a completed home purchase contract dated on or before this date to use the HomePath Renovation program.
The reason? Fannie Mae has decided that its portfolio of foreclosed homes (aka REO properties) is shrinking and special incentives are no longer needed.
For buyers who have a signed purchase contract after October 6, Fannie Mae has loosened guidelines somewhat for its REO properties. Keep in mind that these updates only apply to properties that formerly qualified for the HomePath program:
- Maximum seller contributions of 6% of the purchase price when the down payment is less than 10%.
- When the buyer owns more than 4 financed properties and is buying a 2-4 unit home, the maximum Loan-to-Value is increased to 75%.
In short, buyers of HomePath properties will experience a few changes:
- HomePath buyers will now need an appraisal. HomePath Renovation homes will not pass minimum property requirements. However, there is a renovation program available through FHA. See our FHA 203k page.
- Many HomePath properties are still available at 5% down, although private mortgage insurance (PMI) will be required. The additional cost will be minimal. While HomePath loans did not require PMI, they typically came with higher interest rates.
To find out about HomePath Renovation program alternatives, complete this short online questionnaire and an expert will contact you to find the best program for your needs.
Also, see our complete guide to home renovation loans here.
Read on to find out more about the retired HomePath Renovation program.
HomePath Renovation Loan
Home renovation loans can be tough to find when you’re trying to buy and fix up a property with one loan. But with Fannie Mae’s HomePath® Renovation mortgage, you can do just that, with a small down payment and no mortgage insurance.
To find eligible properties, search on HomePath.com. Any home with the HomePath® Renovation logo is eligible for the program.
HomePath Renovation financing guidelines
Often, foreclosed homes are in bad shape and there are not a lot of financing options for them. That’s where the HomePath Renovation program comes in. This loan program was created specifically for homes in sub-par condition. It enables borrowers to buy the home, and it gets the home off of Fannie Mae’s books of foreclosed homes.
Like the regular HomePath program (see our page about standard HomePath loans), these loans require only a small 5% down payment (increased from 3% as of November 16, 2013), and don’t require monthly mortgage insurance.
Unlike standard HomePath, an appraisal is required for HomePath Renovation loans. The appraisal will reveal two things: 1) repairs needed, and; 2) the future appraised value, after repairs are complete.
The borrower can finance as much as 35 percent of the “as completed” value, but no more than $35,000. The repairs that the appraiser calls out must be done, but the borrower can make additional repairs to their liking, up to the maximum allowed amount.
For example, you could buy a home for $100,000 and request renovations such as a new deck and two renovated baths, totaling $20,000, per a contractor’s bid. Then, the appraiser determines that the home will be worth $150,000 after the improvements are made.
In this example, you could finance the full requested $20,000 above the purchase price, since it’s lower than 35 percent of $150,000.
But, if you purchased a house whose “as completed” value was to be $85,000, the maximum construction cost you could finance would be $28,000 (35% of $85,000).
Surprisingly, the HomePath Renovation loan is available for owner-occupied use, rental properties, and second homes.
If you plan to live in the home, the down payment can be as little as 5% of the purchase price plus improvement costs. For instance, if the purchase price is $200,000, and the construction will cost $25,000, the required down payment would be $11,250 (5% of $225,000).
The HomePath Renovation process
The HomePath Renovation loan starts like most other loans. The borrower pre-qualifies with full income, asset, and credit documentation given to the lender.
Then, the loan process becomes a little different than other loans:
- Once a property is found, the buyer submits requested repairs to the lender, via one or multiple contractor’s bids.
- The lender orders an appraisal. The appraiser figures the future “as completed” value of the home, factoring in requested modifications on the contractor’s bid.
- The lender uses the appraisal to make sure the loan amount and construction costs are within guidelines.
- The lender closes the loan and establishes an escrow account, from which the contractor will be paid.
- The contractor must complete the work and request payment. At that time, the lender inspects the work and issues payment to the contractor.
- Once all the work is complete, the lender does a final inspection.
- If the final inspection is signed off by the lender, it issues any payment due to the contractor. Any funds left over are applied to the borrower’s principle loan balance.
- The house is fixed up, and the buyer has a great home, and one loan and payment.
The contractor can be of the buyer’s choosing but must be “licensed, insured, bonded, experienced, and reputable,” according to Fannie Mae. Bids must be complete with cost breakdowns and descriptions of materials used.
Interior and exterior repairs are permitted. Fixing something purely for cosmetic reasons is allowed, as long as it fits within the maximum construction cost limits. Fences, decks, baths, kitchens, and even landscaping can be included. The requirement is that the improvement must “add value to the property” and be “permanently affixed to the property.”
While appliances are allowed, they must adhere to the “permanently affixed” rule. So the lender may or may not allow a refrigerator to be financed, as it could be removed.
One limitation is for foundation repair. Since homes need to have a sound foundation to be eligible for the HomePath Renovation program, homes with foundation issues will not be on the list of eligible homes.
Questions & answers about the HomePath Renovation Program
What types of loans are available? Both fixed rate as well as adjustable rate loans are available for the HomePath Renovation loan.
What credit score do I need? The minimum credit score for this program is 660 for loans with a down payment of 20 percent or less and 620 for borrowers with more than 20 percent down.
What if I don’t have the required credit score? You should look at FHA’s construction loan, called an FHA 203k loan. It may allow for a lower credit score.
Do I have to use HomePath Renovation financing on these properties? No, you could use an FHA 203k loan to buy and repair the home. However, the down payment will be lower, and there will be no mortgage insurance using the HomePath Renovation loan.
Where do I find a qualified HomePath Renovation Lender? A list of lenders qualified to approve and issue renovation loans is located on the website.
Can I buy and repair a condominium? Yes. In fact, Fannie Mae waives its condo project review requirement for all condos on its HomePath list.
Can I buy a home that I intend to live in if it currently has tenants? Yes, however, the tenants must agree to move out within 60 days, as the borrower is required to move in within that time frame. If the tenant has a non-expired lease, it must be honored according to federal law, so having the tenants move out may not be an option.
How long does the contractor have to complete the repairs? All renovation work must be completed within 90 days of the closing date. There are certain exceptions that can be made but each 30 day extension beyond the initial 90 day period may require an extension fee.
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