This is the beginning of a series of articles concerning the possibility and process of getting your dream home – through a “Renovation Loan”.
Part 1 – Rationale:
When you are looking for a home to buy, especially early in the process, you may run into this scenario. You love the community, the schools are nice, but the house looks dated and needs a lot of work. Then you want to find another property.
Under a conventional loan, that would be your best option, to move on to the next property and settle for a compromise. You convince yourself that you have found your “dream” home but it’s in an okay neighborhood with okay schools, longer commute, higher taxes, etc… At the closing, you are thinking (before you sign your life away into the conventional mortgage), if only my dream home was in the first neighborhood I looked at? Well, don’t let this happen to you. There is another option you can try if you find the home of your dreams but needs TLC. You can buy the home under a renovation loan.
There are many advantages to obtaining a renovation loan. You can finance the property and get funds to repair or improve/upgrade your home in a single mortgage loan. This is both convenient and at other times necessary to qualify for a renovation loan. Existing homeowners can also benefit from a renovation loan. These loans help them improve their homes. They can get funds for improvements, based on the after-improvement value of the property and this is helpful if they have limited equity in their homes.
There are various types of renovation loans out there, but these are two of the most popular ones…
FHA 203k Renovation Loan
There are two types of FHA renovation loans a Standard 203k and a Limited 203k. The Standard is used for larger projects, like rebuilding a home from the ground up. These projects exceed $35,000. For smaller repairs, upgrades and improvements, the Limited 203k will provide up to $35,000. Work must be completed by licensed contractors. The loan requirement is a little less attractive to DIY-ers. Money set aside for renovation work is held in a renovation escrow account and is released when repairs are completed.
HomeStyle Renovation Mortgage (Fannie Mae)
HomeStyle Renovation Mortgage provides funds for the purchase or refinances a home with accompanying funds for home improvement. Loan amounts can be up to 50% of the as-completed appraised value of the property. Approved contractors will handle most of the renovations, However, HomeStyle Renovation Mortgage allows borrowers to perform up to 10% of the project’s as-completed value.
In the next couple of blogs, I will go into details on both FHA and Fannie Mae renovation loan types in order to help educate home buyers and current owners on another possible way to live in their dream home.