Renovation loans are an essential part of the real estate industry. While they may not be used in every transaction, these programs often assist with buying and selling, and they can be crucial for increasing home values and improving overall communities.
When to Use a Renovation Loan?
These are just a few of the many situations that may require the use of a renovation loan…
Buying a Foreclosure
Renovation loans can be excellent tools for homeowners who choose to purchase a foreclosed property that needs repairs. Foreclosures are often a great value for the buyer, but they can have structural or livability issues that require significant repairs and renovations. In many cases, homeowners will purchase a foreclosed property with a small mortgage loan and use a renovation loan to make improvements or changes. With foreclosure purchases, it’s not uncommon for the renovation loan to be double or even triple the amount of the standard mortgage.
Major renovations to a home can be expensive, and if you have low savings, it can be difficult to make these repairs. This is especially true if you are a current homeowner and repairs are needed right away. Where will the funding come from when you already have a tight budget? Renovation loans allow you to improve your home while adding a relatively-small payment to your finances.
When Home Improvements are Absolutely Required
An outdated kitchen? An update would be nice. A leak in the foundation? A repair is needed yesterday. Some renovations can wait, but others need to be addressed right away. If you have an emergency, a renovation loan may help you get the financing you need.
Purchasing an Old Home
If you purchase a new home, the chances of necessary repairs are slim. If, however, you purchase an old home, there is a good chance that repairs are required before the home is livable or, at the very least, up-to-date. Renovation loans are often used by people who buy old homes.
When Selling the Home
Buyers aren’t the only people who use renovation loans. In some cases, sellers will need to utilize these programs to update a home so it is eligible for sale. Some homes may require structural repairs, such as roofing or foundation work, while others may simply need new floors and cabinetry to make the home more appealing to potential buyers.
Types of Renovation Loans Available to American Homeowners
While there are others, these are a few of the most common ways to finance renovations…
Fannie Mae’s Renovation Program
As one of the largest mortgage institutions in the United States, Fannie Mae assists in many different types of loans, including renovation loans. This organization provides backing for a program called HomeStyle Renovation Mortgage, which supports “moderate home improvements” to make repairs that add to the property value. The program is available to individual buyers, investors, and non-profit organization.
To qualify for HomeStyle, the property must be a one to four-unit principle residence, a one-unit second home, or a one-unit property owned by an investor. Manufactured housing is not eligible for the HomeStyle program.
FHA’s 203(k) Mortgage
The Federal Housing Administration (FHA) offers financing that allows homeowners to add a specific amount to their overall mortgage. This program allows borrowers to finance both the purchase of the home as well as the cost of renovation and repairs through a single mortgage.
The 203(k) program includes two subsections. The first is a basic 203(k) mortgage, which is the primary program that is used for the rehabilitation and repair of residential property, specifically single-family homes. The second is called a “Limited 203(k) Mortgage.” This program allows buyers to finance up to $35,000 in repairs and roll this cost into their mortgage.
Choosing Between HomeStyle and 203(k)
The HomeStyle and 203(k) programs are two of the most common sources for renovation repairs. They have some similarities and differences, so it’s worth taking a quick moment to compare the two.
In most cases, if you don’t have a great credit score you will probably choose the 203(k) program. Although the lending qualifications can change, you will likely need a score over 660 to qualify for a HomeStyle loan, and to get the best interest rates, you’ll likely need a score of 740 or higher. These credit scores can be tough to achieve, so many people will opt for the 203(k) program, which is still a good option.
If you have a higher credit score and a good down payment (roughly 10%), then a HomeStyle renovation loan will likely be a better option. The FHA, which offers the 203(k), usually has higher interest rates and there could be upfront fees that are rolled into the loan, increasing your monthly bill.
Jumbo Renovation Loans
The government programs described above have limits on the total amount you can borrow for your renovations. Therefore, you may need to use a jumbo loan to get the financing you need. Similar to a traditional jumbo loan, jumbo renovation loans allow you to borrow a larger amount, but there are higher requirements, which can include credit scores or proof of assets.
While “conventional loans” certainly have their benefits, homeowners who need a large amount to complete massive rehabilitation, repair, and renovation projects will likely turn to jumbo renovation loans.
Funded Repair Escrow
This is an option for homeowners looking to purchase a house the needs significant work. Repair escrows are accounts set aside at closing that help pay for repairs to the property. An appraiser will evaluate how much the repairs will add in value to the property; using the post-repair value, the lender can increase the loan amount. The extra money from the lender is then placed in an escrow holding account, and when the repairs are complete, the money is released to pay for the renovations.
Knowledgable Assistance for Renovation Loans
If you are considering a renovation loan, contact San Diego Purchase Loans and we’ll help you understand the advantages and drawbacks of each option.
We take a common-sense approach to lending, so contact us today and let us help with all your mortgage needs, including jumbo loans, FHA loans, and renovation loans!
I was referred to Chad by my Realtor for a purchase of a new house. The experience with Chad and the team (I mainly worked with Juliann) was nothing short of outstanding. From start to finish there were always quick to respond and when needed, notify me of any new documentation that was required. There were very helpful explaining to me the pros and cons of different financing options as well as some other loan related issues, such as termite clearance outside the purchase contact and septic tank certification process. Overall, very knowledgeable and processional team. Loan preapproval was done in a single day and loan documents were ready for signing in 21 days, which was 9 days ahead of schedule. That never happened to me before.
“This is the second time that I have worked with Chad (home purchase & refinance). He has become my subject matter expert and someone I depend on for all finance needs related to our home and real estate investments. My favorite things about Chad are his depth of knowledge, responsiveness, honesty and the great service he provides. I have referred countless friends and family of mine to work with him for no other reason than I know that he will treat them well and equip them for the best possible outcome. Chad will add tremendous value to any real estate transaction that you have and I am grateful to have him as a resource.”
highly recommend Chad and his team. They were always available for any questions, concerns etc. we had. The process to close the loan went super fast. Chad and his team always went above and beyond. The customer service was the best! I will definitely recommend to all Thank you again for everything!