With a CHOICE Renovation loan you can finance up to 97% of the purchase price PLUS the costs of your renovation and repairs. If you do not qualify for the Home Possible Program you may still be able to finance up to 95% of the purchase price PLUS the costs of your renovations and repairs.
The percentage you can finance will also depend on the type of property you own or are purchasing. For example, if you own or are purchasing a 1 unit investment property, you can finance up to 85% of the purchase price PLUS the cost of repairs and renovations.
MINOR REPAIRS
For minor or more cosmetic repairs and renovations Freddie Mac also offers the CHOICE RenoExpress program. This program is for items such as new windows, roof repairs, carpeting and painting. It is not for major structural renovations. With the CHOICE RenoExpress program you can borrow up to 10% of the value of your home after the renovations are completed. This can be increased to 15% of the post renovations value in certain rural areas. The renovations must be completed within 180 days of closing and an inspection will be required to confirm completion.
MAJOR RENOVATIONS
Let's take a look at the Freddie Mac CHOICE Renovation program. This is the program buyers and current homeowners will use for their major home renovations. It is very similar to the Fannie Mae Homestyle program with some minor differences we will highlight below. With this program the renovations must be completed within 450 days of the Note Date (usually the closing date) and an inspection will be required to confirm completion.
HOW MUCH CAN I BORROW?
First, you will need to have the income and credit score that will allow you to qualify for the amount you want to borrow. You should get a pre-approval so that you know how much you can borrow before you put an offer on a home you want to renovate. This will give you the ceiling on how much you can spend on renovations after meeting the seller's purchase price.
The amount you can borrow with any Freddie Mac loan is limited by the maximum allowable loan amount in the county the property is located in. These maximums are increased for 2, 3 and 4 unit properties. The Freddie Mac maximum loan amounts are the same as the Fannie Mae maximum loan amounts in every county.
The next thing you need to know is how much you need for a down payment. The percentage you have to put down will be determined by the type of property you are buying (see below), and whether you qualify for the Home Possible Program (which allows you to put 3% down).
We then have to know both:
1) the purchase price plus the cost of renovation,
AND
2) the value of the home after your renovations are completed. This is called "The As Completed Appraised Value."
The amount of money you can receive and use to complete your renovations will equal up to 75% of the purchase price plus the cost of renovations OR 75% of "The As Completed Appraised Value" WHICHEVER IS LESS.
How will you know if the home will be worth as much as you need? Simple. The appraiser will inspect the house and set a value for the house without the renovations. After looking at your proposed renovation plans the appraiser will then set a value for the house once your renovation is completed.
EXAMPLE 1:
- Say you’re buying a 1 unit home that will be your primary residence for $100,000 and you need to borrow an additional $100,000 to do your renovations. You are preapproved with your lender for up to $250,000.The appraiser inspects the property and looks at your renovations plans and calculates the "as completed" appraised value is $220,000 The LESSER of the 2 numbers is the purchase price plus the cost of renovations ($200,000) This means you can receive up to $150,000 to complete your renovations. ($200,000 X 75% = $150,000)
- In this scenario we have assumed you do not qualify for the Home Possible Program. Therefore, the down payment for this home would be 5% of $200,000 or $10,000 dollars. It will not be 5% of $220,000 because the purchase price plus the cost of your renovations is $200,000 which is the lesser of $220,000. With this 5% down, you are eligible to borrow $100,00 for the purchase price plus receive $90,000 for your renovations.
EXAMPLE 2:
- You want to buy a single family home that will be your primary residence in a great neighborhood with a CHOICERenovation loan. You are preapproved with your lender for up to $500,000. An available home in your desired neighborhood is on the market for $400,000, but it is older and needs a lot of work. Your contractor estimates all of the renovations you want would cost $150,000 The appraiser inspects the property and looks at your renovations plans and calculates the "as Completed" appraised value is $600,000. This means you can receive up to $412,500 to complete your renovations. ($550,000 X 75% = $412,500)
- In this scenario we have assumed you do not qualify for the Home Possible Program. Therefore, you could put down 5% of $550,000 ($400,000 purchase price + $150,000 cost of renovations = $550,000) or $27,500 and borrow $500,000 pursuant to your maximum pre Approval amount. The remaining $22,500 would have to come from your own personal funds. Don't forget, you will still have to pay typical closing costs on top of the purchase price and cost of renovations.
OR
- You could eliminate items worth $25,000 from the proposed renovations so that the purchase price plus the cost of renovations = $525,000. The appraiser looks at your changes and calculates the "as Completed" appraised value is $590,000. $525,000 is the lesser number so 75% of $525,000 is the maximum amount you could receive to complete your renovations. ($393,750)
- You would then put down 5% of $525,000 or $26,250 and borrow $498,750 which keeps you just below your maximum pre-approval amount. This would give you $400,000 for the purchase price plus $98,750 to complete your renovations. You could then pay for the remaining $26,250 of renovation costs with your down payment. Don't forget, you will still have to pay typical closing costs, plus inspection costs in addition to the purchase price and cost of renovations.
NOTE: A contingency reserve of 10% of the cost of renovations will be required if the utilities are on. If the utilities are not on then 15% in reserves will be required. The reserves can come from personal funds or from renovation loan proceeds.
A contingency reserve is not required for CHOICERenovation Mortgages whose proceeds are used exclusively to finance the addition or renovation of outdoor structures used for leisure and recreation.
HOW MUCH WILL I NEED FOR A DOWN PAYMENT?
The type of property you are buying and renovating will determine the amount of down payment required as follows:
PRIMARY RESIDENCES:
- A 1 unit home that will be the borrower's primary residence will require a 3% down payment if you qualify for the Home Possible Program. Otherwise a 5% down payment is required. (Condominiums and Townhomes are allowed.)
- A 2 unit home that will be the borrower's primary residence will require a 15% down payment.
- A 3-4 unit home that will be the borrower's primary residence will require a 20% down payment.
- A 1 unit home that will be the borrower's second home will require a 10% down payment. (Condominiums and Townhomes are allowed.)
- A 1 unit manufactured home that will be the borrower's primary residence will require a 5% down payment. The Renovation funds will be capped at the lesser of $50,000 or 50% of the “as completed” appraised value.
INVESTMENT PROPERTIES:
- A 1 unit home that will be the borrower's investment property will require a 15% down payment on a purchase transaction. (Condominiums and Townhomes are allowed.)
- A 1 unit home that will be the borrower's investment property will allow a first mortgage refinance loan of up to 75% of the value of the property after the renovations are completed. (Condominiums and Townhomes are allowed.)
WHAT IF MY RENOVATIONS WERE DONE USING A HOME IMPROVEMENTS STORE?
With the CHOICERenovation program you can use a Home Improvement Store program to do your renovations using the store's short term financing options and then at closing use the CHOICERenovation loan proceeds to pay off 100% of the balance due for labor and materials shown in the Home Improvement Store contract. The contractors used by the store must meet Freddie Mac's contractor requirements. Obviously, you want to confirm the store can meet this requirement before you sign the store contract.
CAN I REFINANCE MY CURRENT HOME AND RENOVATE IT?
YES! If you want to renovate your home you can use the Freddie Mac CHOICERenovation program. The major difference is the calculations used to determine the amount available to you. But it's pretty simple. With a CHOICERenovation refinance, you can receive up to 75% of the "as completed value" for your renovations.
EXAMPLE:
- Say you own a 1 unit home that is your primary residence. You have an existing mortgage with a balance of $200,000 and you need to borrow an additional $150,000 to do your renovations. You are preapproved with your lender for a mortgage loan of up to $500,000. The appraiser inspects the property and looks at your renovations plans and calculates the "as completed" appraised value is $450,000 This means you can receive up to $337,500 to complete your renovations. ($450,000 X 75% = $337,500)
- In this scenario you can receive $200,000 to pay off your current mortgage + $150,000 to complete your renovations. If we assume you do not qualify for the Home Possible Program then you could be able to borrow up to 95% of the "as completed" appraised value of $450,000 or $427,500. This would give you an additional $77,500 available to you to cover typical closing costs plus more extensive renovations that are approved by your lender. Or, you could simply stick with the original planned renovations, borrow $350,000 and pay your closing costs from your own personal funds.
NOTE: When considering this program for renovations, if you will be paying off your current mortgage as part of the transaction make sure to consider all of your options. Currently, many people have mortgages that carry historically low interest rates. Due to a number of factors, these low rates are not available today. Therefore, you may want to consider a 2nd mortgage home equity loan - if you can qualify for it.
NOTE: A contingency reserve of 10% of the cost of renovations will be required if the utilities are on. If the utilities are not on then 15% in reserves will be required. The reserves can come from personal funds or from renovation loan proceeds. A contingency reserve is not required for CHOICERenovation Mortgages whose proceeds are used exclusively to finance the addition or renovation of outdoor structures used for leisure and recreation.
WHAT KIND OF RENOVATIONS CAN BE DONE?
Actually, there are not many restrictions on what type of work can be done with your renovation funds under the Freddie Mac CHOICERenovation program. Simply put, the changes must be permanent to the home and provide value. From small projects like paint and floors to large scale rehabs or additions, you can use a CHOICERenovation loan for just about anything as long as you meet the permanent/value criteria and the renovation work is completed within 450 days of the Note date. (The Note date is usually the closing date.) This means you can use the loan for projects like:
- New bathrooms, kitchens, and floors;
- Build a new or renovate an existing Accessory Dwelling Unit.
- Disaster proof your home. This is unique to the CHOICERenovation program and will allow you to install improvements that will protect your home where it is vulnerable to natural disasters. So in coastal areas this would allow you to install storm surge barriers or retaining walls.
- New landscaping;
- Mechanical upgrades and improvements (such as upgrading electrical or HVAC)
- 50% of material costs can be withdrawn at closing.
- CHOICERenovation loans can also be used to build accessory dwelling units like a carriage house or garage apartment or to finish a basement for an in-law suite.
- Porch and patio additions.
- In ground swimming pool.
WHAT ELSE CAN RENOVATION FUNDS BE USED FOR?
In addition to purchasing the property and paying for the project, you can also roll many other costs into your CHOICERenovation loan, including:
- Labor and materials
- Soft costs (architect fees, permits, licenses).
- Project Contingency Reserves (related to the cost of labor, materials, and soft costs for unforeseen extra costs in the renovation). The contingency reserve is optional unless the property is a 2- to 4-unit home.
- A payment reserve of up to 6 months of mortgage payments (including property taxes and insurance) is permitted when the borrower must vacate the property during renovation. The amount can be financed in the loan amount if the value will support such financing. The reserve is allowed only for the period in which the property is uninhabitable due to the renovations. (If monthly HOA fees are included in the renovation escrow account, these will be included in the reserve and the lender must pay the HOA fees on behalf of the borrower.)
- A contingency reserve of 10% of the hard and soft renovation costs is required for two- to four-unit properties. The contingency reserve may be financed or it may be funded separately by the borrower.
- Closing costs
- Permits and license fees
WHAT TYPES OF RENOVATIONS ARE PROHIBITED?
The Freddie Mac CHOICERenovation loans allow you to make numerous changes and improvements to your property, but they do have some restrictions. Here are a few examples of what is not allowed by the Freddie Mac CHOICERenovation loan:
- Tearing down a home and building a new home.
- Structural changes to over 50% of a manufactured home.
- Building a second home on your new property.
- Improvements that are not permanent to the property like furniture, certain types of landscaping, light fixtures, or moveable storage sheds or units.
WHO CAN DO THE WORK?
You must choose a contractor or in some cases you can do the work yourself. For Contractors the following requirements will apply:
- Lender must review the contractor hired by the borrower to determine if they are adequately qualified and experienced for the work being performed.
- Borrowers must have a construction contract with their contractor. Freddie Mac has a model Construction Contract that may be used to document the construction contract between the borrower and the contractor.
- Plans and specifications must be prepared by a registered, licensed, or certified general contractor, renovation consultant, or architect. The plans and specifications should fully describe all work to be done and provide a clear statement of when various jobs or stages of completion will be scheduled (including both the start and job completion dates). This is important so that everyone knows when renovation funds are to be disbursed to the contractor (commonly referred to as "draws") and what conditions have to be met by the contractor in order to have the funds disbursed by the desired dates. (i.e. inspection and sign off on the work done by an agreed upon consultant.)
You can do the Renovation work yourself with the following restrictions:
- The Do-It-Yourself financing does not exceed 10% of the as completed value.
- Inspections are required for all work items that cost more than $5,000.
- The property is a one-unit owner-occupied home, and not a manufactured home.
- The reimbursement is limited to the cost of materials or the cost of properly documented contract labor (sweat equity may not be reimbursed).
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