Looking for a loan that will allow you to purchase a property and make renovations? You’ll have a few options to choose from, but the best may be a HomeStyle loan from Fannie Mae.
Let’s explore why these renovation loans are so popular among buyers all across the United States, including right here in San Diego!
Top 5 Reasons Why HomeStyle is the Best Renovation Loan
1. Allows You to Renovate Your Current Home without Using HELOC or Credit Cards
With this loan, you have the chance to purchase a home and make the renovations without using a home-equity line of credit, also known as a HELOC. You also won’t have to use credit cards to make the purchase.
HELOCs can have many benefits for some homeowners, but most people will prefer to use a HomeStyle loan over these options. However, many HELOC programs come with higher interest rates, which means you could be paying more over the life of the loan, and it’s possible to pay only a small amount on a HELOC, extending the payments and the interest for decades.
Credit cards have their risks as well, and are rarely a good option for financing renovations to your home. When paid off on time, credit cards can be useful, but if you let a payment slip, you’ll pay a massive amount of interest.
With reasonable rates and flexible terms, the HomeStyle loan is usually a superior option, and it can help you avoid using these two choices.
2. Can be Used to Purchase and Upgrade a Short-Term Rental
Owning a short-term rental is a great way to bring extra income to your household. Essentially, a short-term rental is a property that you rent out in small increments; usually for a weekend, a week, or even a couple of weeks to a month. These are usually vacation-type properties near beaches, attractions, or events that are in high demand by the general public. Basically, when you think of short-term rentals, think of the properties placed on AirBnB.
Unfortunately, many loan programs do not allow for the purchase and renovation of a short-term rental, so you may have trouble finding the right financing. This is generally because short-term rentals, as well as second homes and vacation properties, tend to have higher risks for lenders compared to primary homes. The risk comes from the fact that in times of financial hardship, borrowers will protect their homes while letting additional properties go unpaid. Wouldn’t you, after all, make payments on your home and let your vacation property go into foreclosure?
For this reason, it can be hard to find financing for the purchase and renovation of a short-term rental, but this is not an issue with HomeStyle Renovation loans from San Diego Purchase Loans.
3. Appraised Value Based on Post-Renovation Results
Loan-to-value ratio (LTV) is an important factor in mortgage lending, and from a borrower’s perspective (as well as the lender’s), it’s best to have a low LTV. With these loans, the appraised value of the property is based on the home once it is complete.
Here’s how it might work in a simplified example:
Say you have a property that needs renovations and is currently valued at $200,000. However, it needs renovations totaling $50,000 in costs, but once complete the home will be valued at $300,000. To make the purchase and complete the renovations, you borrower $250,000. If the loan were processed using the pre-renovation value, the LTV would be over 100%. (The loan is higher to the value.) However, if the loan uses the post-renovation value of $300,000, the LTV would be about 83%. ($250,000 loan on a property worth $300,000.)
Having this lower LTV will reward you with numerous benefit, and could help you secure a better interest rate on the loan, depending on other factors.
4. No Required Improvements and No Restriction on Project Type
Some renovation loans have limits on what you can do with the financing you get through the program. For example, they might restrict you to projects that are deemed necessary to the livability and safety of the home, which means useful projects like a kitchen remodel could be off limits. They may also require that the project adds value to the home, so if a project merely increases your enjoyment of the home, but doesn’t add value, you might not be able to complete the project with renovation-loan financing.
HomeStyle, however, has no such restrictions. With this loan, you can complete virtually any project, including bathroom remodeling, energy-efficiency upgrades, and electrical updates. You can even use the loan to complete a granny flat, which allows you to add a separate living space that is either attached or separate from the existing home.
5. Can Be Used for Second Home or Investment Property
Financing for a second home or investment property can be extremely difficult. In most cases, you will find tighter requirements for the borrower, such as debt-to-income ratio or a credit-score requirements. They may also have higher interest rates, even if your credit and income are stellar. As we explained above, this is because second homes have more risk to the lender, so they compensate by adding tighter conditions for loans on these properties.
With a HomeStyle loan, you can get financing for investment properties, including multiunit properties. Single-unit homes are much easier to purchase and renovate with these loans, allowing you to enhance your portfolio and have more properties available for purchase. However, with a multiunit property, there is a 25%-down-payment requirement, which represents a significant amount to most borrowers.
Find Out if a HomeStyle Renovation Loan is Right for You
The team at San Diego Purchase Loans can help you find the right renovation loan for your specific needs. Whether you are purchasing and upgrading a primary residence, or you want to buy a fixer-upper for your investment portfolio, we have the knowledge, experience, and resources you need.
