Love the home but not the condition?

Wondering how to finance home improvements when purchasing?

We all know that when finding the right home it is all about location, location, location.  What happens when the location you want to be in only has older homes that needs some updating?  Where are is a person supposed to get the additional money to fix it up after they have just bought the home, paid for their down payment and closing costs? The renovation loan is the answer!  Renovation loans allow you to buy (or refinance a home) and pull money out to do renovations all in one loan.

Renovation loans have been around for years but very few people know about them and as a result it is a loan program that is very underutilized especially in today’s housing market.  Renovation loans are designed to help individuals whether they are buying an existing home or looking to remodel their current home receive money to do repairs to the home without draining their savings accounts or pulling a Home Equity Line of Credit.

What are the different renovation loan types?

There are different renovation loans from FHA, VA to Conventional and they all have different guidelines that have to be adhered to.  Regardless of the loan you choose all programs are 30 year fixed loans that never have pre-payment penalties.  Work must be completed in 90 to 180 days depending on how extensive the repairs are that need to be completed.

VA

• Allows for 100% financing
• Only allowed on home purchases
• Does not allow for structural changes/repairs
• Applicant must be eligible for a VA loan

FHA 203K Limited

• Down payment requirement is 3.5%
• Can be used on home purchase or refinance
• Maximum amount allowed for repairs is $35,000
• Does not allow for structural changes/repairs

FHA 203K Standard

• Down payment requirement is 3.5%
• Can be used on home purchase or refinance
• No limit on the amount that can be used for repairs
• Does allow for structural changes/repairs
• Allows building additions
• Allows for tear down/re-build

Conventional

• Down payment requirement is 5% for owner occupied, 10% on 2nd homes and 15% down on investment properties
• Up to 50% of the as-completed value may be used for renovation/repair funds
• Allows for purchase and refinance
• Allows for building additions
• Allows for tear down/ re-build
• Allows for major landscape work including adding a pool

How Do Renovation Loans Work?

Renovations loans are based on the future appraised value of the home after the repairs are completed.  The detailed cost breakdown is sent to the appraiser with the appraisal order, the appraiser completes the appraisal based on the value after the repairs that are detailed out in the cost breakdown are completed.  The down payment amounts are based on the full loan amount, not the purchase price.  Here is an example assuming an FHA 203K Limited loan:  purchase price is $100,000, renovation costs are $20,000, future appraised value of the home is $130,000.  Down payment would be 3.5% of the purchase price plus the renovation costs ($120,000) which equals $4,200.

Renovation loans require a licensed contractor to complete a detailed cost breakdown/bid of the repairs that will be completed.  All work must be completed by the licensed contractor or the licensed sub-contractors that he got bids from to complete the cost breakdown.

Depending on how much work needs to be completed contractors have between 90 to 180 days to complete the work

Once the loan closes the contractor receives up to 50% of the renovation funds up front to buy materials and pay for overhead.  Once the renovation is completed and has been signed off by the original appraiser and or inspector the remaining 50% of the funds are released to the contractor.