Fannie Mae is streamlining the process or people to get loans for home renovations, accessory dwelling units or ADUs and adjustable-rate mortgages, thanks to a major update to its lending rules.
The mortgage giant has introduced a rule change that makes it easier for borrowers to qualify for adjustable rate mortgages, or ARMS. Fannie Mae previously turned down adjustable-rate mortgages or ARMs with seven- to-10-year terms if the future interest could be more than 3% higher than the starting rate. Now, that 3% limit is gone. Lenders can approve these adjustable rate mortgages, even if the rate jumps by more than 3% after the fixed period.
Adjustable-rate mortgages typically allow the homeowner to lock in a low fixed-interest rate for a predetermined period, such as three, five, seven or 10 years. Once the period ends, the rate becomes adjustable, changing based on current market trends and other factors. The loans, which typically have 30-year terms, can be structured to adjust every month, six months or annually.
Kimber White, president of the National Association of Mortgage Brokers, told Homes.com that "it's a great idea to remove overlays with ARMs." Doing so, she added, will make it "more practical and accessible, especially for borrowers who plan to sell or refinance before the adjustment period, are purchasing in competitive markets where every basis point matters or need lower initial payments to qualify for their desired home."
The real barrier to adjustable rate mortgages adoption "remains pricing competitiveness," White said. "Without a meaningful rate advantage over fixed-rate products — as FHA [Federal Housing Administration] ARMs traditionally offer — these conventional ARMs may still struggle to gain market traction despite the regulatory improvements."
Before the 2008 financial crisis, many people took adjustable-rate mortgages with low starting interest rates that later jumped much higher. When those rates went up, a wave of borrowers couldn’t afford their new, higher payments, which contributed to the foreclosures and the financial meltdown. That crisis led to the government's takeover of Fannie Mae and Freddie Mac. This year, though, the Trump administration has had ongoing discussions about potential reforms or ways to alter the government’s oversight.
Lenders see less risk with adjustable-rate mortgages that have a longer fixed period — like seven to 10 years — because borrowers have more time before the interest rate changes. For shorter-term adjustable-rate mortgages like three to five years, lenders are more cautious, and qualify borrowers based on what their payment would be after the rate goes up to make sure they can afford it.
"Mortgage brokers play a crucial role in educating clients about these products and ensuring ARMs align with their long-term financial plans," White said.
Additionally, White explained that mortgage brokers are encouraged to ensure that borrowers understand the potential payment shock, market timing risks and qualification considerations.
"Even with improved adjustment caps, rates can still increase significantly over the loan's lifetime," said White. "Borrowers who assume they'll refinance before adjustment may face challenges if market conditions change. Lenders qualify borrowers at higher rates, which may limit purchasing power despite lower initial rates."
Loan options for remodeling, manufactured homes, accessory units
Fannie Mae also has rebranded and expanded its HomeStyle Energy loan. The new version, called HomeStyle Refresh, can now be used for wider range of projects — including cosmetic updates, functional renovations and repairs for disasters or environmental hazards like lead, asbestos and mold.
With HomeStyle Refresh, homeowners can finance renovations costs up to 15% of the home’s expected value after the work is done.
The loan-to-value ratio will be determined by either the home’s appraised value after renovations are complete or the total of the purchase price plus renovation costs — whichever amount is lower.
An LTV ratio is a measure lenders use to assess the size of the mortgage loan to value of the property securing it. For limited cash-out refinances, which is a type of refinance where the borrower replaces their existing loan with a new one, the loan-to-value ratio is based solely on the as-completed appraisal value.
All renovations must be finished within six months of signing the loan note. Lenders are required to submit proof of completion through Loan Quality Connect, Fannie Mae's online platform for managing loan quality and compliance. Until the documentation is received, the loan remains with recourse, meaning the lender is responsible if issues arise.
However, Fannie Mae will only require the lender to repurchase the loan if the borrower becomes seriously delinquent — specifically, if payments are overdue by 120 days or more.
Lenders no longer need special approval from Fannie Mae to offer HomeStyle Refresh loans, making the process faster and more accessible. However, they must label these loans with special feature code 892 so Fannie Mae can easily identify and track them in its system.
Fannie Mae is also making it easier for homeowners to take on bigger renovation projects by expanding its HomeStyle Renovation loans. Notably, Fannie Mae has removed the previous $50,000 cap on renovation costs for manufactured homes, allowing for more ambitious structural upgrades.
"These programs can play an important role in helping homeowners maintain and improve their individual units, which directly affects the long-term health of shared communities," said Dawn Bauman, chief executive officer of Community Associations Institute, an organization that represents homeowners, condominiums and other associations across the globe.
"When owners have access to affordable, streamlined financing for repairs and upgrades, they are better positioned to keep their homes safe, functional and up to community standards," Bauman told Homes.com.
Fannie has introduced additional flexibility for accessory dwelling units, especially for manufactured homes. Lenders have more leeway to offer financing for multiunit properties or situations where there is more than one accessory dwelling unit on a property, broadening options for homeowners seeking to add or improve secondary living spaces.
"Many manufactured homes are part of community associations and face the same aging-infrastructure challenges as other forms of housing," Bauman said.
"Access to funds upfront can remove a significant barrier for homeowners who need to address urgent repairs or start projects that require early costs for materials or permits," Bauman said.
"In community associations, delays in necessary repairs can affect neighboring units or shared systems. Making it easier for owners to begin improvements helps reduce those risks and supports more proactive maintenance across communities," she added.