GREAT
LOCATION BUT HOUSE NEEDS WORK BEFORE WE CAN CALL IT HOME.
You
have been searching for months for the right home in the neighborhood
you want to settle down and raise your family. If I only had the
money to remodel and upgrade the kitchen and bathrooms, it would be
the perfect home for my family. If you can see the potential in a
home and your heart is set on buying but you don’t have the savings
to cover both a down payment a
nd
a
renovation, there are loan products out there that could help you
make your dream a reality.
Consider
a loan with a renovation loan included…. all in one loan.
The
Federal Housing Administration (FHA) 203(k) rehabilitation loan or
Fannie Mae HomeStyle Renovation Mortgage could be good financing
options for buyers seeking fixer-uppers. These loans allow you to
purchase the home with a reserve that’s put in escrow to fund
renovations.
There
are strict guidelines which must be followed and it’s important to
understand who can benefit from acquisition and renovation loans.
Buyers
must be able to afford the mortgage payments but they don’t have a
lot of cash on hand or savings to be able to pay for acquisition cost
and renovation.If the scope of the renovation is big and it’s a
total overhaul costing 100% more than the existing property, you may
want to consider another kind of renovation loan.
First
time home buyers with limited budgets who want to live in a
particular area can usually benefit from buying a less expensive home
that’s a fixer-upper — and these loans make it financially
feasible. An FHA 203(k) or Fannie Mae HomeStyle conventional
renovation mortgage allows consumers to go in and purchase the home
and work with the contractor with renovation funds included in one
loan allowing buyers to get maximum leverage from their available
cash.
If
you’re looking to make minor changes, however, borrowing money
through a renovation loan may not make the most financial sense.
Saving and making improvements over time may give you a better
outcome.
How
do these loans work?
Once
the loan closes, one portion pays for the house while the other is
deposited into an escrow account. As work is completed, the mortgage
lender sends an inspector to review the work. If the work is
completed to the scope of the project and to state and local building
codes, money is released to pay the contractor.
How
much can I borrow?
The
loan amount depends on the appraisal value and your renovation plans.
The
buyer will find a house and work with a contractor or HUD consultant,
and determine how much it will cost to do the repairs. An appraisal
is ordered based on the value of the property after all the
renovation work has been done — you have to submit the scope of
work and the bid to the lender and appraiser so they know what you
plan to do.
The
scope of your renovation may have to be dialed back in some cases, as
neighborhood comps have to support the home’s post renovation
value. A renovation loan makes sense only if the renovation costs
don’t put the house new value far above comparable properties. If
they do, you may have to wait on making additional renovations or pay
for them yourself.
What
about choosing the contractor?
It
may take some time to find the right contractor for your
project.Verify contractor is licensed, insured, and in good standing
with the state licensing authority. Be sure to call their references
and ask to view jobs they’ve already completed to make sure you
like their work. (You must work with a general contractor when you
borrow money through these products — you cannot be the general
contractor.
You
have to decide on the contractor before the loan closes. You will
select the contractor but they must be approved by the lender. If you
have a contractor in mind whom you want to use, they have to apply to
be approved by that lender and it would be a good idea to get other
bids prior to making a final decision.
How
do the FHA 203(k) and HomeStyle loans differ?
FHA
203(k) loans require a 3.5% down payment and you can borrow up to the
FHA loan limit in your county. HomeStyle loans on the other hand
require a 5% down payment and you can borrow up to the Fannie Mae
conventional loan limits. With a HomeStyle loan you’re also able to
finance renovations costing up to 50% of the completed appraised
value.
While
the FHA 203(k) and the HomeStyle loans both allow you to borrow up to
a value that’s supported by the comps, the FHA Streamlined 203(k)
allows financing only up to $35,000 into the mortgage for repairs and
improvements.
While
a contractor’s bid is required for most (if not all) of the work,
the only program that allows for work without a license contractor is
the FHA 203(k) and it would only be allowed for minor repairs —
small-dollar-size repairs where the customer can provide evidence
that they have the time, tools, and the assets to do the renovations.
HomeStyle
loans on the other hand don’t allow for any do it your self
repairs. However, while they allow borrowers to make the same
renovations as in a FHA 203(k) loan, they also allow for the addition
of luxury items.
It
is important to understand If you plan to buy a fixer-upper using
these products. Work with a home mortgage consultant who understands
the product and can help guide you through the process…..it will
make the experience simple and rewarding.