Fannie Mae Homestyle Loan Purchase

[Brendan Chisholm]

I wanted to use this month’s blog to stray a little bit away from the apartment investment content. This month, I will focus on residential real estate. A goal of my wife and I was to find a new home. In particular, we wanted to find a fixer upper. We set out to find a home, while keeping our condominium to eventually renting it out. We needed to be able to qualify for another mortgage. After being pre-qualified at the beginning of the year, we began to search for a new place to call home.

The two of us were motivated to find a place to call home. We have been living in an urban setting for the better part of a decade. Luckily, we had an amazing realtor to help us along our journey. About halfway through our search, the world as we knew it halted due to COVID-19. There were restrictions put in place for viewings. We also found out from our lender that renovation loans such as the FHA Construction and Fannie Mae Homestyle loans were suspended. We contemplated if we wanted to adjust our criteria. We did, but we didn't move forward with anything on the market.

Around the end of April, we were informed by our lender that their renovation financing products went live again. That same weekend, my wife and I went on the MLS to find and identify properties to look at on a beautiful weekend day. Throughout this entire time, we were in constant communication with our realtor. We sent him the list of properties on a Friday night. He texted us shortly after receiving it and told us to meet him at a home around his place before we see the other houses.

Our realtor informed us when we met him that his neighbor was in the midst of moving to a new place. The neighbor’s son had been handling the cleaning and clearing out the house to get it ready for market. He asked our realtor if he knew of anyone interested in purchasing the property. Our realtor knew we were motivated and that we were approved buyers. With our masks on, we viewed the property one at a time, while the other scoped out the neighborhood. After both walking through, we knew we found the right one.

After some back and forth with the seller, we finally settled on the purchase price with the seller. Considering the comps in the neighborhood, we feel like we found a good deal. We were able to get the house under contract below market value. As of late homes have been going for at market value. Prior to COVID-19, that is an approximate 5% discount to appropriate list price. Properties going at appropriate list price has not been the case for my county in some time.

My wife and I emailed our lender and begin the work needed to obtain financing for either an FHA 203k Loan or Fannie Mae Homestyle Loan. We put together our initial forecast for the renovation costs and ensured everything complied with each loan. After going through all the details with our lender, we decided to go with the Fannie Mae Homestyle Loan. One thing for readers to note, is that the Fannie Mae Homestyle Loan requires a ten percent contingency reserves. For example, if your renovation costs are $50,000, the reserves will be $5,000. This reserve amount will be included in the final down payment requirement. Our closing was slated for less than sixty days after the offer accepted, so we needed to act swiftly. We needed to provide final estimates to our renovation lender within three weeks.

I started calling General Contractors immediately. I was able to line up six to separately walk through the house with me and get our estimates. This house is a split level, built in the 1960s, and is originally a three bed, two bath. After the previous owners’ children moved out, they converted one of the bedrooms into a dining room. Our intentions for the home is to convert it into a four bed, and two and a half bath. Knowing that this house would be the one we call home, we were a little more lenient on our budget. If this was a flip, the end product would be totally different. We were able to squeeze in all the walkthroughs almost immediately, and then we waited for estimates.

After receiving the estimates, we talked through each one with each general contractor. After some deliberation, we made our decision. The next two weeks comprised of subcontractors' walkthroughs, a walkthrough with our HUD inspector, multiple floor plan changes, and finalizing our appliances. During these two weeks, we had a mandated walkthrough with the HUD inspector. The inspector went through the details of how the draws will work. The inspector also mentioned that he will need the general contractor to provide him the estimates for his review. We were finally ready to submit the initial estimate to the HUD inspector.

After the HUD inspector presented the estimate to the lender, we were given the green light to order the appraisal. We waited with bated breath until the appraisal came back. And guess what?!? The post renovation appraisal came back lower than the purchase price and renovation costs. We knew we expanded our budget a bit to accommodate our wish list, but we were confident on recent comps that the appraisal would be higher. I called the lender to see what we could do. She calmed us down a bit and told us to send over the floor plans. Regardless of the appraisal, we could still close. The lender would challenge the appraisal and ask the appraiser to use our floor plans. A few days went by, and the challenge worked out! The appraisal came back almost 10% higher than the initial appraisal!! This new appraisal was higher than our purchase and renovation costs.

With all the numbers finalized, we discussed all our options with the lender. In some instances, with the Fannie Mae Homestyle loan, there is an opportunity to finance up to six months’ worth of mortgage payments in the loan amount. However due to the size of our loan, we opted not to pursue that option. Our loan amount was at the maximum amount prior to our interest rates raising by more than 1.5 percent. It made our decision an easy one. After submitting our most recent bank statements and pay stubs, we were ready to close!

Closing was the last day of June. It was uneventful, aside from all of us social distancing and wearing masks. After a couple hours or reviewing all the legal documents, we were handed the keys, the first renovation check, and the deed to obtain permits. The dumpster was dropped off a couple hours later. We are only a couple days in, and the entire interior is ripped down to sheet rock where appropriate.

I will provide regular updates on how this renovation progresses through my social media channels and this website.