Hands down the best terms available when financing residential rental property is conventional loans underwritten to Fannie Mae or Freddie Mac guidelines. By far these two mortgage giants make up the largest segment of loan types in today’s marketplace and as such remain very competitive. Every mortgage company that places loans on single family or 2-4 unit residential properties offers such programs. But what if a particular property needs some serious upgrades or has some on a single family home and a traditional lender won’t place a loan on the property until the repairs are made? Or what if the property is in decent shape but could use some updating to appeal to potential tenants in the area?

Fannie Mae has a special loan program called the HomeStyle Renovation loan that allows investors to purchase a single family home and borrow funds needed to make necessary home improvements as well. How does it work? The loan will finance up to 50% of the “as completed” value of the property. If a property is listed at $100,000 and once repairs are made the home would be worth $275,000 the amount financed could be as high as 50% of $275,000 or $137,500. That leaves $37,500 available for renovation costs.

Lenders will base the final value on a contractor’s plans and specifications, including both hard and soft costs and order an appraisal to determine what the property will be worth when completed. Acceptable improvements are anything that will add value and is a permanent fixture to the home. A wooden deck a privacy fence is acceptable but outdoor furniture is not. For a single family home, the minimum amount down is 10% of the purchase price and because the value is based upon the as completed amount, there will be no mortgage insurance even though the initial down payment was only 10%. This is a little known program and it’s sometimes hard to find a lender who knows how to work the program but once a lender is found it’s an excellent resource.