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A renovation loan is a smart way to purchase a home that’s in less-than-perfect shape.
The CHOICERenovation loan is one of several home renovation mortgages buyers can consider. Like FHA 203(k) and Fannie Mae HomeStyle loans, it lets you roll the costs of improving your new home into your monthly mortgage payment.
Guaranteed through Freddie Mac, the CHOICERenovation loan comes with low down payment requirements and other benefits that make buying a home more affordable.
When comparing mortgage lenders, ask whether the CHOICERenovation loan is available.
» MORE: Top home renovation loan lenders
What is the CHOICERenovation loan?
Many existing homes in the United States are old and need repair. At the same time, many prospective home buyers — especially those shopping for their first home — are struggling to find houses that fit their budget.
Buying a fixer-upper with the CHOICERenovation loan may be a way to tackle both challenges, says Kelly Marrocco, director of affordable credit and policy at Freddie Mac.
Let’s say you find an affordable three-bedroom ranch built in 1967, but it still has the original kitchen appliances. Or you fall in love with a cute farmhouse in a rural area, but the roof has seen one too many hailstorms.
With the CHOICERenovation loan, you could finance homes like these — and the cost of necessary improvements — all in one loan. The loan also has a refinance option to help homeowners improve their current dwelling.
Is the CHOICERenovation loan right for you?
It’s open to any qualified borrower, but Marrocco says Freddie Mac had four types of people in mind when developing the CHOICERenovation loan:
First-time home buyers looking for affordable options.
Rural home buyers who have few new homes to choose from.
Senior homeowners who need accessibility improvements so they can age in place.
Multigenerational households that want to customize a home to fit family needs.
Borrowers can finance renovations that cost up to 75% of a home’s value after being fixed up, as long as they qualify for the total loan amount. For example, you could buy a $200,000 house that needs $150,000 in repairs, but you’d need to satisfy the credit score and debt-to-income requirements for a $350,000 loan.
New CHOICERenovation provisions starting Nov. 1, 2021
For mortgages that close on or after Nov. 1, 2021, CHOICERenovation loans will cover renovations completed through home improvement store programs, so long as they meet Freddie Mac’s contractor requirements. The loan will cover up to 100% of the cost of materials, as well as other costs outlined in the contract, including labor.
Borrowers will now be able to use the loan to pay off short-term financing that may have been used to repair or renovate an existing home prior to the loan closing.
The new provisions also grant borrowers 60 days to complete renovations before they must move into the home, which may be especially helpful if the home needs major repairs or renovations that affect safety.
How to use the CHOICERenovation loan
Most renovation loans work in a similar way, though the financial requirements, process and eligible improvements may vary slightly. In addition to replacing a leaky roof or upgrading to more efficient appliances, however, a CHOICERenovation loan can help you:
Disaster-proof your home. The loan can be used to install what Marrocco calls “resilience items” to help a home survive environmental hazards. Especially useful in disaster-prone areas, this provision includes improvements like storm surge barriers, foundation retrofitting for earthquakes and brush removal in fire zones. The CHOICERenovation loan can also be used to repair damage from a past natural disaster.
Earn a down payment credit. Marrocco says qualified borrowers can do their own repairs and improvements. In exchange for their sweat equity, these borrowers may earn a credit toward their down payment, as long as work is completed prior to closing.
Making minor renovations? Consider CHOICEReno eXPress
For those looking to buy or refinance a property that requires only cosmetic renovations, such as window or door replacements, Freddie Mac’s CHOICEReno eXPress loan might be a better fit. Qualifying renovations can cost up to 10% of the home’s post-renovation value — or up to 15% in certain rural regions — without special preapproval from the lender. Renovations must be done within 180 days, and Freddie Mac requires a home inspection after the fact to verify that they were completed.
CHOICEReno eXPress is intended to be a more streamlined product, and it will be available to borrowers with closing dates on or after Nov. 1, 2021.