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The Fannie Mae Homestyle Renovation Mortgage is a type of renovation loan or rehab loan. Essentially, the HomeStyle loan – and other products like it – enables home buyers to borrow both the purchase price of the potential home and any renovation costs and wrap it up into one mortgage loan amount.
A Fannie Mae Homestyle Loan is different from a construction loan, which is generally for building an entirely new home. Instead, the HomeStyle Renovation loan is for home buyers who want to buy a fixer-upper or renovate an existing structure and pay the renovation off each month when they pay their monthly mortgage.
Although Rocket Mortgage ® doesn't offer renovation mortgages at this time, we want you to be aware of all of your options and alternatives.
Fannie Mae is not a lender. Instead, Fannie Mae is a government-sponsored enterprise (or GSE) that buys mortgages from banks. This allows banks to get debt off of their books and then use the money to originate more mortgages. This is how banks stay liquid and keep the economy afloat.
But Fannie Mae doesn’t exist just to help out the banks. As a government agency, Fannie Mae exists to help make housing more affordable to mid- to low-income borrowers. Essentially, because they buy up mortgages, Fannie Mae lessens some of the risk to banks so that financial institutions can lend money to “riskier” borrowers – like those with low income or poor credit histories and scores.
The Fannie Mae HomeStyle Loan functions a bit differently than a regular conventional loan. The money is dispersed to pay for the home purchase at closing, but in order to use the funds for renovation, an approved contractor must submit plans to the bank for a “draw” to get paid. Then after inspections to ensure the work is done, the bank sends the money to the contractor. This limits fraud (homeowners and contractors using renovation loans for other things), but it is more of an administrative headache than simply using cash for home improvements.