I met Deborah at an investment club meeting when she was very keen on landing her first property. She had spent a lot of time thinking through her strategy and I listened with interest as she described it to me. Until, that is, she mentioned her plan to finance the deal with a Fannie Mae Homestyle loan. That’s when I guided to her a quiet chair in the corner and shared the pros and cons of this loan with her.

Fannie Mae Homestyle loans have the advantage of being one of the few all-in-one buy and rehab loan products available through major lending institutions. However, they do come with some difficulties and challenges. Let me share what I explained to Deborah.

What is a Fannie Mae Homestyle Loan?

The Fannie Mae Homestyle loan is similar to the FHA 203(K) loan, allowing you to roll the costs of purchasing and rehabbing a house into a single mortgage. As a result, you can save on closing costs. Currently, the financing can be either fixed-rate or adjustable-rate with 15 or 30-year terms. You can borrow up to 85% of the loan-to-value of the investment property, which is considered the after repair value, to purchase distressed one-unit properties, including single-family homes, condominiums, co-ops, and Planned Unit Development. (PUDs).

The biggest advantage of a Homestyle loan is its flexibility compared to other traditional property rehab loans. The monies can go toward any type of renovation or upgrade—including luxury amenities like a swimming pool—as long as it adds value to the property. It is also generally more affordable than other methods of financing, such as a second mortgage or home equity line of credit. And, depending on the loan-to-value calculation, you may not need to carry the extra expense of mortgage insurance. Sounds pretty good, right?

Most new investors think this is a good way to access financing for their first investment, but the Homestyle loan does come with some requirements that could be stumbling blocks.

• Difficult to find a lender. Fannie Mae does not let just any lender sell the Homestyle product. The mortgage broker must meet specific requirements and have experience with renovation loans. As a result, it can be arduous to find a broker who offers this product.

• Time constraints. You are required to have the entire renovation project complete within 12 months. This can be challenging for new investors who are not used to managing large projects, especially when seasonal cycles and weather get in the way.

• Limited do-it-yourself ability. Even if you are pretty handy, you will likely have to hire a qualified contractor to perform most of the work. Financing for do-it-yourself projects may not exceed 10% of the after-repairs value.

• Contractor review. The lender will perform a review to determine if the contractor you choose is up to snuff. In addition, you will need to submit the contractor’s plans and specifications, including project milestones and completion dates. This decreases your flexibility in selecting a contractor as some may not be willing to undergo lender review or submit the extra documentation.

• Bureaucratic delays. The lender requires inspections and appraisals at various points in the rehab process. This could cause unanticipated delays in project completion, which may be especially anxiety-provoking considering the tight timeline you would be up against.

With all of these lender requirements, you can see how a new investor may get tripped up. With any renovation project, there are lots of balls in the air at once. But with Fannie Mae Homestyle financing, it gets even more complicated.

Real Estate Investment Financing Solutions

At the end of my chat with Deborah, she felt wary of financing her first real estate investment with a traditional lender and asked me if there was a better way. “Of course!” I told her. Several years ago, I became an independently owned and operated HomeVestors® franchisee and began my investing business with financing provided for qualifying properties by the franchisor. This allowed me to get the ball rolling. I encourage all new investors to start out on the right foot by relying on HomeVestors®’ proven real estate investing business model. You can help avoid costly traditional financing mistakes by getting in touch with HomeVestors® today.

Each franchise office is independently owned and operated.