Freddie Mac combines mortgage and renovation financing

Borrowers can get cash to fix up both their primary home, vacation home and rentals.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | August 22, 2021

How about a simple, low-cost solution for a combination of home financing and home improvements? ChoiceReno eXPress Mortgage from Freddie Mac is simple genius.

Starting Nov. 1, you can use this easy-peasy mortgage to facilitate your home purchase (or refinance) and get an additional 10% of the property’s value in real dollars for the fixings. If your property is in designated high-needs community then we’re talking up to 15% for fixings.

The cash can be used to build attached accessory dwelling units (a.k.a, granny flats), room additions, moving walls, roofing, energy efficient appliances, insulation, air conditioning and new windows. Cosmetic repairs like painting or replacing doors are also acceptable.

Ideally, this is for older, tired properties in need of improvements.

You cannot use this financing instrument for newly constructed homes.

One-to-four unit condos, townhomes, second homes and even single-unit rentals are all in play.

For example, let’s say your purchase offer was accepted at $900,000 with a 20% down payment or $180,000.

Your base loan amount is $720,000. You have identified $90,000 worth of work (remember it’s a maximum 10% of the sales price). Instead of a $720,000 loan, Freddie will provide a single $810,000 mortgage that includes the cash for improvements.

There’s no mortgage insurance even though you appear to have less than 20% equity — $810,000 divided by $900,000 is 90% loan-to-value. You will not be charged Freddie Mac’s expensive gotcha markup pricing for a cash-out refinance either. That’s a deal.

If your real estate agent says we don’t have time to get this approved during a 30- or 45-day escrow, well that’s nonsense.

You need a good written estimate from a licensed contractor or a home improvement store (Lowe’s or Home Depot, for example) for the material and labor costs. It does not have to be as granular and detailed as a construction loan.

If you are licensed contractor, you can do the work yourself. But you cannot pay yourself for labor.

Unlike construction financing, you are allowed to advance 100% of the materials costs to the store or your contractor upon mortgage funding.

Owner-occupied mortgage rules normally obligate borrowers to occupy within 60 days of funding, but not for this loan program. You do not have to occupy the property as renovations are taking place.

Your lenders’ appraiser must be for a completed value of $990,000, which equals your purchase price of $900,000 plus the $90,000 of improvements. The work must be completed within 180 days after closing. An inspector will come out to confirm completion.

If there is an unforeseen delay, you must contact your servicing lender.

This financing instrument is the best I’ve ever seen for first-time buyers, avoiding the need to come up with the big bucks normally needed to transform your new house into a personalized palace.

Your primary residence can be purchased with as little as 5% down payment or 5% equity (for refinance transactions) with loan amounts up to $822,375 in Los Angeles and Orange counties. Even with 5% down you can still pump those improvements to 10% of the property value.

In some cases, Freddie Mac allows down payments as low as 3% conforming loans (capped at $548,250). Freddie Mac does not offer high-balance mortgages in the Inland Empire.

Your renovation-increased loan amount can never exceed Freddie’s designated maximum loan limits.

Other options include construction loans, home equity lines-of-credit and fixed-rate second mortgages. All these carry significantly higher interest rates than a Freddie Mac first mortgage. And you would be dealing with either two mortgages or having to refinance an always expensive construction loan into what is called a takeout mortgage.

Tips from Freddie Mac: You are responsible for negotiating any agreements and/or warranties with your contractor. You are responsible for overseeing the work and the timeliness. Remember, this needs to be completed six months from the note date.

The single and biggest complaint I’ve received from borrowers that have done cash-out mortgages for remodels and the like have been about contractors. About 60% of my clients have said they’d never use their contractor again. Go off warm leads. Get referrals from folks you trust who had good experiences.

Take the time to visit projects they’ve recently completed. Don’t be a cheapskate. Lower bidders tend to jack up pricing through hefty change orders. Always check references and licensing.

Financing instruments competing with ChoiceReno eXPress Mortgage are Fannie Mae Homestyle, FHA 203(k) and the VA Renovation mortgage. But the red tape, expenses and the brain drain with Freddie’s ChoiceReno eXPress are a fraction compared with these similarly situated products. Simple genius.

Freddie Mac rate news: The 30-year fixed rate averaged 2.86%, 1 basis point lower than last week. The 15-year fixed rate averaged 2.15%, 1 basis point higher than last week.

The Mortgage Bankers Association reported a 3.9% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $38 more than this week’s payment of $2,270.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point cost: A 30-year FHA at 2.25%, a 15-year conventional at 1.875%, a 30-year conventional at 2.5%, a 15-year conventional high-balance ($548,251 to $822,375) at 1.99%, a 30-year conventional high-balance at 2.69% and a 30-year fixed jumbo at 2.875%.

Eye catcher loan of the week: A 30-year fixed rate at 2.875% without closing costs.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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