Fannie Mae HomeStyle® Refinance: How It Works

From roof replacements to bathroom remodels, the cost of home improvements and repairs can add up quickly. 

Unfortunately, not everyone has tens of thousands of dollars just sitting around to fix up their home. Or at least they might think they don’t.

In reality, however, many homeowners have considerable built-up equity, especially those who purchased before the most recent housing boom. According to the Federal Reserve, cumulative homeowner equity nationwide sits at $34.4 trillion.

If you have equity in your property and want to use it to finance improvements or repairs, the Fannie Mae HomeStyle renovation loan may just be the most practical way to do so. We’ll go over how the Fannie Mae HomeStyle refinance program works and how it stacks up against other options to tap into your equity.

Note: refi.com does not currently offer HomeStyle loans, but you can compare your cash-out refinance and HELOC options here.

What Is a Fannie Mae HomeStyle® Refinance?

A Fannie Mae HomeStyle refinance replaces your existing mortgage and provides you with the funds to make renovations, all with a single loan.

Unlike other equity-accessing alternatives, you may even be able to borrow more than your home’s current worth. That’s because the HomeStyle renovation program takes into account your home’s estimated value after improvements are complete.

Plus, the Fannie Mae HomeStyle loan is considered a limited cash-out refinance, which typically offers lower interest rates than a full cash-out refi or a home equity line of credit (HELOC).

How Much Can You Borrow?

Through the HomeStyle renovation program, you can borrow up to 97% of your home’s after-repair value (ARV),  but renovation costs themselves cannot exceed 75% of the as-completed value.

For example, say your home is presently worth $400,000, and you want to remodel your kitchen and bathrooms, and build out your unfinished basement. After the improvements are complete, your home is estimated to appraise for $475,000.

In this scenario, you could borrow as much as $460,750 (97% of the ARV), which includes the amount necessary to pay off your existing loan. If your current mortgage balance is $300,000, you would have access to up to $160,750 for renovations.

When Does a HomeStyle® Refinance Make Sense?

When might it make the most sense to use the HomeStyle refinance to fund renovations? Some of the most common scenarios include:

• You Have Equity but Not Enough Cash: Major home improvements can easily cost tens of thousands of dollars. Utilizing your built-up equity is often one of the most effective sources for funding.
• Renovations Will Significantly Increase Your Home’s Value: Since the Fannie Mae HomeStyle loan is based on your home’s worth once improvements are complete, it can provide you with access to substantially more funds than alternative equity options.
• You Want a Single, Fixed-Rate Mortgage: While many homeowners turn to HELOCs to finance home improvements, this means being responsible for a second mortgage payment with interest costs that can change over time. With a HomeStyle refinance, you can wrap everything into a single, fixed-rate loan.
• You Can Eliminate Your Mortgage Insurance Costs: Conventional loans require homeowners with less than 20% equity to pay for private mortgage insurance. FHA borrowers typically pay a similar mortgage insurance premium for the life of their loan. The HomeStyle loan program can be a great way to eliminate mortgage insurance costs, so long as you’re borrowing less than 80% of your home’s “as-completed” value.

The Biggest Risks of Using a HomeStyle® Refinance?

While Fannie Mae’s HomeStyle Renovation loan can be a practical method to finance home improvements, it may not be the best option for everyone. Here are some downsides and risks to consider before choosing a HomeStyle refi.

• Your Home’s ARV May Not Appraise High Enough: Even though the amount you’re eligible to borrow is based on your home’s after-repair value, it may not necessarily appraise high enough to provide all of the money you need for improvements, especially if you currently have limited equity.
• Delays Can Drag Out Renovations Beyond Anticipated Timelines: The lender holds renovation funds and disburses them to your contractor once certain milestones are met. Because of the potential lender oversight involved with a HomeStyle loan, it can take longer to complete your renovation than with alternative options that provide an upfront lump sum.
• Budget Overruns Can Leave You Paying the Difference: While your contractor will submit an estimated cost of renovations as part of the loan approval process, final costs often change, particularly for large or complex projects. Since the size of your loan is fixed at closing, you may be on the hook for covering any potential budget overruns.
• Homeowners With Low Interest Costs Will Reset Their Rate: Since a HomeStyle renovation refinance replaces your existing loan, you’ll be taking on an entirely new interest rate. For some homeowners, this may be similar to or lower than what they currently have, but those locked into ultra-low rates may wind up paying much higher interest costs.

How the HomeStyle® Refinance Works (Step-by-Step)

How, exactly, does a HomeStyle renovation refinance work? Here’s a step-by-step walkthrough of the process.

1. Apply for the Refinance

Applying for a HomeStyle renovation refinance involves a credit check and the submission of documentation about your income and other assets. You’ll typically want to obtain a loan estimate from a minimum of three lenders to ensure you get the best deal possible before selecting the company you apply with.

2. Get Licensed Contractor Bids and Submit Your Chosen Proposal

In some cases, homeowners may be able to do limited improvements themselves that represent no more than 10% of the property’s ARV, although this can depend on your lender’s specific policies. In most cases, you need to obtain bids from licensed contractors and submit the chosen proposal to your lender for final approval.

3. Obtain an Appraisal of the “As-Completed” Value

With a renovation plan in place, your lender orders an appraisal of your home. The appraiser takes into account the proposed improvements and estimates the property’s “as-completed” value.

4. Proceed Through Underwriting and Close on the Loan

Underwriting is the stage of your loan application where the lender takes an in-depth look at your finances and overall creditworthiness. While you’ll have submitted most necessary paperwork when you initially applied, your loan officer may ask for additional documentation at this point. Once the underwriting team signs off on your loan, you are cleared to close.

5. Funds Are Deposited Into a Renovation Escrow Account

After closing, your existing mortgage is paid off with the proceeds from the refinance, and additional funds for repairs and improvements are deposited into a renovation escrow account managed by your lender.

6. Have Draw Schedule Inspections at Renovation Milestones

As work on your home is completed, your lender orders inspections in accordance with the draw schedule. If the inspector approves the progress, a portion of the funds in escrow is released to your contractor. This process repeats until the work is finished and the final inspection is conducted.

HomeStyle® Refinance vs Cash-Out Refinance

A cash-out refinance is similar to a HomeStyle refinance in that you can tap into your property’s equity to fund repairs with a single mortgage. However, cash-out loans are typically limited to 80% of your home’s current value, whereas a HomeStyle refinance may let you borrow as much as 97% of its after-repair estimate.

	HomeStyle Refinance	Cash-Out Refinance
Rate Structure	Fixed-rate (in most cases)	Fixed-rate (in most cases)
Use of Funds	Home improvements only	Any purpose you choose
Appraisal Method	“As-completed” value	Current market value
Renovation Oversight	Lender approves all work	You oversee all improvements
Long-Term Equity Impact	Can leave you with limited equity based on your borrowing needs	Requires you to retain at least 20% home equity

HomeStyle® vs HELOC for Renovations

HELOCs allow you to access your home’s equity over a multi-year period through a revolving line of credit. Since a HELOC is a type of second mortgage, your existing home loan will not be affected, making this a reasonable alternative for borrowers locked into interest rates well below current rates.

	HomeStyle® Refinance	HELOC
Rate Structure	Fixed-rate (in most cases)	Variable rate
Interest Rate	Lower	Higher
Use of Funds	Home improvements only	Any purpose you choose
Monthly Payments	Single loan payment	Multiple loan payments
Closing Costs	Higher (based on your full mortgage amount)	Lower (based on the size of your line of credit)

HomeStyle® Refinance vs FHA 203(k)

HomeStyle renovation loans are often compared to FHA 203(k) loans because both let homeowners refinance their mortgage and fund renovations with a single loan. However, there are several key differences between the two programs.

The Fannie Mae HomeStyle refinance is a conventional loan, which generally makes it a better fit for borrowers with stronger credit scores and existing home equity. It also allows for a wider range of renovations, including luxury improvements such as pools or outdoor kitchens.

An FHA 203(k) refinance, on the other hand, is backed by the Federal Housing Administration and may be easier to qualify for if you have lower credit scores or limited equity. However, FHA loans often require upfront and ongoing mortgage insurance, which can increase long-term borrowing costs.

Feature	HomeStyle® Refinance	FHA 203(k) Refinance
Loan Type	Conventional	FHA
Minimum Credit Score	Typically 620+	Often 580+
Mortgage Insurance	Not required above 80% LTV	Usually required
Eligible Renovations	Broad, including luxury upgrades	More restricted
Appraisal Basis	After-repair value	After-repair value
Downside	Stricter qualification standards	Higher long-term insurance costs

In general, borrowers with strong credit and substantial equity may benefit more from a HomeStyle refinance, while homeowners with lower credit scores or less equity may find the FHA 203(k) refinance easier to qualify for.

Requirements for a HomeStyle® Refinance

Most requirements for a HomeStyle refinance are the same as qualifying for any other type of conventional loan. However, HomeStyle refinances have specific guidelines for the home improvement process.

• Credit Score: While Fannie Mae has no fixed minimum credit score requirement, most lenders look for a score of 620 or higher. For lower interest costs, however, you typically want a score of at least 700, with the best rates going to applicants with scores of 740+.
• Debt-to-Income Ratio: Lenders often require a maximum debt-to-income (DTI) ratio of 43%, although you may be able to qualify with a DTI as high as 50% in some scenarios.
• Equity Requirements: Although homeowners can finance up to 97% of their property’s after-repair value for their primary residence, equity requirements are stricter for other occupancy types. Second homes can have a maximum loan-to-value (LTV) of 90%, while HomeStyle refinances on investment properties are capped at 75%.
• Contractor Rules: Contractors must be properly licensed, and all renovation plans must be approved in advance by your lender. In some cases, you may be able to complete small renovations comprising 10% or less of your property’s ARV yourself, but this can vary based on your lender’s policies.
• Eligible Renovations: HomeStyle renovation loans can be used for just about any improvement that adds permanent value to your property. This can include structural repairs and changes, cosmetic updating, and even luxury upgrades.

What Renovations Add the Most Value?

You can use the HomeStyle program to make nearly any repair or renovation that adds permanent value to your property. However, some improvements are likely to increase your home’s worth more than others.

Some of the best value-adding renovations include:

• Kitchen remodels
• Bathroom updates
• Roof replacements
• HVAC overhauls
• Energy-efficient improvements
• Adding livable square footage

Fannie Mae HomeStyle® Refinance FAQs

Still on the fence about whether a Fannie Mae HomeStyle refinance is right for you? Here are answers to some of the most frequently asked questions from borrowers.

Is the Fannie Mae HomeStyle® Renovation Refinance Right for You?

The Fannie Mae HomeStyle renovation refinance loan can be a practical way to fund home improvements. However, alternatives such as cash-out refinances and HELOCs may be better suited for certain borrowers.

Before deciding on a specific loan type, be sure to review all your options with an experienced loan officer who can provide a personalized breakdown of the pros and cons of each.