Freddie Mac has officially announced their new renovation loan product, CHOICERenovation. This new program brings Freddie Mac into the renovation lending space and positions itself as an alternative to the popular Fannie Mae Homestyle Renovation , FHA 203K, and VA renovation loan program. CHOICERenovation allows borrowers to buy a fixer-upper, or for existing homeowners to renovate their homes. This is particularly useful because of the aging housing market and for those homes that have been affected by natural disasters. See below for more information on this new program.
Program Overview
Similar to the escrow holdback mechanics of other popular renovation programs, the CHOICERenovation allows borrowers to use mortgage proceeds to pay for repairs and/or improvements. It does not require borrowers to obtain interim construction financing prior to securing permanent financing. This program will be an update to Freddie Mac’s current renovation program. Although the mechanics of the renovation loan may be similar to other loan programs, the guidelines to the renovation related issues are unique depending on the program being compared.
Borrowers can use the mortgage proceeds to pay for the renovations and improvements up to a maximum LTV of 95%. In addition, the CHOICERenovation program allows specially approved seller-servicers to deliver mortgages prior to the completion of the renovation improvements.
Eligible Mortgages
Except as otherwise specified in new Guide Chapter 4607, all eligible mortgage products or offerings in the Guide, including Freddie Mac Home Possible® Mortgages, are eligible for delivery as CHOICERenovation Mortgages.
Guidelines
- Fixed rate or adjustable rate
- Purchase or no cash-out refinance transactions for all occupancy types and most property types
- For refinances, the maximum allowable renovation cost is 75% of the “as-completed” appraised value of the property
- For purchases, the maximum allowable renovation cost is 75% of the lesser of the sum of the purchase price and renovation costs, or the “as completed” appraised value of the property
What CHOICERenovation means for renovation lenders
This will allow lenders to leverage this program vs. FNMA’s Homestyle program to create and foster competition between the two GSEs. This will benefit the market because it provides another option for salability in the secondary market. Lenders will now realize more flexibility to offer multiple conventional renovation products.
Freddie Mac vs Fannie Mae Renovation Program Comparison
CHOICERenovation |
Homestyle Renovation |
|
Conventional Program |
Yes |
Yes |
Requires lenders to get pre-approval to sell loans |
Yes |
Yes |
Allows Lender Commingling of escrow accounts |
No |
Yes |
Requires interim construction financing |
No |
No |
Allows approved sellers to deliver mortgages prior to completion of the renovation |
Yes |
Yes |
Eligible property types |
|
|
Eligible repair types |
Funds to be used to finance renovations to an existing dwelling, and may include:
Proceeds may be used to renovate or repair a property that has been damaged in a disaster or for renovations that will protect the Mortgaged Premises in case of a future disaster (e.g., storm surge barriers, foundation retrofitting for earthquakes, retaining walls, etc.) |
Any type of renovation or repair is eligible, as long as it is permanently affixed to the property and adds value. Renovations must be permanently affixed and add value to the property. Sweat equity is not an allowable cost. Allowable costs include the following:
|
Maximum LTV (1-unit owner-occupied) |
Up to 95% |
Up to 97% |
Maximum financed renovation costs for refinances |
For refinance: Limited to 75% of the “as-completed” appraised value of the property |
For refinance: Limited to 75% of the “as-completed” appraised value of the property |
Maximum financed renovation costs for purchases |
For purchase: Limited to 75% of the lesser of the sum of the purchase price and renovation costs, or the “as completed” appraised value of the property |
For purchase: Limited to 75% of the lesser of the sum of the purchase price and renovation costs, or the “as completed” appraised value of the property |
Contingency reserve |
Required minimum of 10% |
Required minimum of 10%, optional up to 15% |
Two ways to deliver CHOICERenovation loans to Freddie Mac
- Renovation work is completed: deliver mortgages with no additional steps
- If renovation work is not completed prior to delivery, follow the information in the Single-Family Seller/Servicer Guide, chapter 4607
For both options, the renovations must be completed within a year of the note date.
For more information on how to manage renovation loans post-close, learn more about Land Gorilla’s construction management software.
