There’s a new loan option for homes don’t meet the “livability” requirement for traditional financing. Freddie Mac recently launched the ChoiceRenovation mortgage to help finance home renovations without a second loan. It’s similar to the Fannie Mae HomeStyle loan with several new features including financing for the construction of a “mother-in-law” unit, and disaster protection upgrades.
ChoiceRenovation Loan for Fixer-Uppers
The ChoiceRenovation loan is an option for both home buyers and home owners. (1) It allows homeowners to refinance into a lower rate with just one loan that includes extra cash for renovations. That includes things like a kitchen upgrade, new flooring or carpets, or an Accessory Dwelling Unit or ADU — commonly known as a mother-in-law unit. The extra space could be used for in-laws, guests, or short-term rentals.
The ChoiceRenovation loan can also be used to purchase an older home that needs repair and doesn’t qualify for traditional financing. Instead of taking out an acquisition loan, and a second home equity line of credit or cash-out refi for the renovations, this loan allows the buyer to finance the home and the renovations with just one closing. It’s great for first-time home buyers who want to put some sweat-equity into the upgrades, or fix-and-flip investors who plan on doing the same before they put the home back on the market. Borrowers can also earn a credit toward their down payment if they complete any work before the closing.
Another feature of the ChoiceRenovation loan is the ability to finance so-called “resilience items.” Those are features that will make a home more resilient to natural disasters at a time when fires, floods, hurricanes, and earthquakes are growing more destructive. Resilience items include things like surge barriers, foundation retro-fitting, and retaining walls. Upgrades to make a home more energy efficient also qualify.
The Loan with Many Choices
Some of the properties that are eligible for a ChoiceRenovation loan include:
1. A primary residence with one-to-four units.
2. Single-unit second homes.
3. Manufactured homes.
4. Single-family investment properties.
Both the Homestyle loan from Fannie Mae and the ChoiceRenovation loan from Freddie Mac are available to investors. The require 15% down for single-unit properties which is more than the 3% down required for owner-occupiers, but is still lower than typical construction loans. The minimum down payment may also vary depending on the lender, and the number of units, or what they are being used for.
According to Freddie Mac, a one-unit primary residence needs 3% down. The down payment increases to 15% for a two-unit primary residence, such as a duplex, and 20% for a three-or four unit property. A second home requires 10% down. You’ll need 5% down for a manufactured home, and for investment property, it’s 15% down with a 7/1 or 10/1 Adjustable Rate Mortgage.
Borrowers can get a ChoiceRenovation loan for upgrades that are worth as much as 75% of the home’s estimated value after the upgrade. They also have to have a qualifying credit score,
Lenders have two ways to transfer the loan to Freddie Mac. They can wait until the renovations are finished, or they can deliver the loan while the work is being done. The deadline to get all the work done is within one year of the date of the loan.
Freddie Mac says that 80% of all U.S. homes are at least 20 years old. 40% of them are at least 50 years old. Freddie Mac’s Danny Gardner is hoping this will help solve the affordable housing crisis. He says, “Given the increasing age of existing housing stock, the growing number of millennials and other first-time homebuyers looking for more affordable home-buying options, and the increase in retirees opting to age in place, the Freddie Mac ChoiceRenovation mortgage is a flexible solution to finance or refinance these fixer-uppers.”
This new loan option was launched during National Homeownership Month in June. It’s also part of Freddie Mac’s “All for Home” mission to make homeownership available for more borrowers. (2)