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Freddie Mac CHOICERenovation construction / renovation loan: 2019 guidelines

Peter Miller
The Mortgage Reports contributor

Freddie Mac: Your renovation loan of choice?

The CHOICERenovation (sometimes written “Choice Renovation”) mortgage from Freddie Mac gives borrowers a new option to buy and fix-up homes without the need for two separate closings. This is a way to save thousands of dollars in excess settlement expenses.

The loan also allows homeowners to refinance, wrapping renovation costs into the new loan amount.

Home buyers and owners alike are more and more interested in renovating a residence, pumping up demand for one-close financing products.

A recent report from Harvard’s Joint Center for Housing Studies found that owners spent $424 billion on residential remodeling in 2017, up 50% since 2010. An estimated 55 million homes are now at least 50 years old, a number that grows every year.

Will Freddie Mac’s new product become the new fixer-upper loan of choice?

Check your Freddie Mac CHOICERenovation Loan eligibility. (Sep 22nd, 2019)

Why get a renovation loan?

Renovation loans are required to improve a property unless you have cash on hand. Buyers and owners alike benefit from these loans.

For home buyers

As the housing market continues its never-ending ascent, well-maintained homes are harder to find.

The CHOICERenovation loan allows you to consider run-down homes that would not meet traditional financing requirements.

These homes are less expensive and come with less competition. As a first-time home buyer, you have a great chance at getting an offer accepted on a home that needs TLC.

For homeowners

Is the kitchen run down, need new carpet, and been thinking about a mother-in-law unit?

Those items can run into the mid-five figures minimum. With CHOICERenovation, you can refinance into a lower rate, potentially, and finance improvements with one loan.

Build an accessory dwelling units (ADU) “mother-in-law” suite

It’s hard to overlook the new demand for accessory units, additions which can be used for guests, in-laws, and short-term rentals.

Some two million short-term rentals per night are handled through Airbnb alone. It follows that a lot of people want to renovate and take advantage of this growing income stream, renovations which need to be financed.

Eliminating a second loan closing is a big deal

Many borrowers would like to buy and fix-up but traditionally it’s taken two loans – and two closings – to finance such deals.

There’s one closing for acquisition financing. Then, later, there’s a second closing for such options as cash-out refinancing, a second loan, or a home equity line-of-credit (HELOC). In all three situations, such loans can require a full-blown closing and that can mean big costs for such things as legal fees, title insurance, and taxes.

The FHA’s 203k program, Fannie Mae’s HomeStyle Renovation loans, and now the ChoiceRenovation program all offer acquisition-and-renovation financing with just one loan and one closing. These programs, however, have differences.

“Resilience items” aka disaster protection upgrades

Fannie Mae’s HomeStyle Renovation loans and Freddie Mac’s ChoiceRenovation program are pretty much alike. However, the ChoiceRenovation mortgage has a feature that’s likely to become more common. With the ChoiceRenovation program you can finance so-called “resilience items.”

What we’re talking about is financing for such things as surge barriers, foundation retro-fitting, and retaining walls. In other words, this is a way to get funding for disaster protection upgrades. It’s a recognition that fires, floods, hurricanes, and earthquakes are real and increasingly expensive.

What properties are eligible for CHOICERenovation?

The CHOICERenovation program is open to a wide variety of properties.

  • Primary residences with one-to-four units.
  • Manufactured homes.
  • Single-unit second homes.
  • One-unit investment properties.

Investment Properties

The government has long tried to understand investors. HUD, the overseer of the FHA 203k rehab loan program, has wanted to “consult with the industry…to explore legislative and policy reforms that will…provide the neighborhood rehabilitation benefits of the investor program without the abuse and risk to the insurance fund.”

These words were written in 1996. Real estate investors have been banned from the 203k program ever since.

Fannie Mae and Freddie Mac feel differently. The HomeStyle and ChoiceRenovation programs provide investor financing for single-unit properties with a minimum of 15% down. This is higher than the 3% down required for up-front for owner-occupiers.

But it’s still a very low down payment considering it’s a rental property construction loan.

Down payments and LTVs

Borrowers can finance a one-unit prime residence with as little as 3% down, the same as with Fannie Mae’s HomeStyle financing.

The minimum down payment is 3.5% for FHA 203k rehab financing for borrowers with at least a 580 credit score. In reality, lenders are likely to insist on higher credit scores for CHOICERenovation than for the FHA program. Credit score requirements for HomeStyle and CHOICERenovation vary by lender.

With a CHOICERenovation mortgage, the minimum down payment can vary with the number of units and their usage. As examples:

  • One-unit primary residence – 3% down / 97% loan-to-value ratio (LTV).
  • Two -unit primary residence – 15% down (85% LTV).
  • Three & four unit primary residence – 20% down (80% LTV)
  • Second home – 10% down (90% LTV).
  • One-unit investment property 15% down with 7/1 or 10/1 ARM (85% LTV)
  • Manufactured home – 5% down (95% LTV)

Does CHOICERenovation require a consultant?

The FHA 203k program requires borrowers to obtain the services of a 203k consultant. The consultant guides the homeowner through the construction process.

It’s not a bad idea. On one hand, borrowers get the benefit of a construction professional to advise them, on the other the required use of a consultant is an additional cost.

Neither the HomeStyle Renovation nor CHOICERenovation programs require a consultant. However, the use of such a professional may help borrowers save time and money. HUD has an online list of approved consultants which can be searched by location.

Draws

Each program holds funds at closing. The ChoiceRenovation program requires the establishment of an escrow (trust) account. The account includes renovation funds, contingency funds and up to six months of mortgage principal, interest, taxes, and insurance (PITI). The lender can disburse up to 50% of the cost of materials after closing.

For additional information and specifics, speak with lenders. Ask about rates and terms, how draws are handled, and which program best fits your needs and preferences.

Get a CHOICERenovation eligibility estimate

The benefits of a one-close construction loan are many.

FHA 203k and HomeStyle are two popular products, and now Freddie Mac one-ups those products by offering a new choice that allows accessory dwelling units and other bonuses.

Get your CHOICERenovation eligibility and rate check and start your journey to a renovated home.

Verify your new rate (Sep 22nd, 2019)