Have you found your home in the perfect neighborhood, the right school district, but it needs work? Maybe the layout is perfect, but it looks like you’ve transported yourself to the 1970’s when entering the front door. Even if it is a recently built home, it may need improvements to meet your taste, or what if you thought you found the right home and the appraisal requires repairs? Luckily, a renovation loan will provide the solution. Plus, there are several variations of these fixer-upper loans including VA renovation, FHA 203k, and the Fannie Mae Homestyle renovation loan. These options may cover renovations along with the purchase or refinance of a primary residence, second home, or investment property.
How Does a Renovation Loan Work?
The beauty of a renovation loan is that a homeowner can make their mark on a house. They can bring their vision to life. HGTV makes it look so easy, but in the real world, roadblocks come up such as having the cash. This type of home improvement loan solves issues with the following characteristics:
- Buying a home and including improvements into the loan amount
- Include renovation costs in the loan
- Use “as completed value” instead of the current value
- Improvements are completed after closing
- Finance appraiser required repairs
- Minor repairs to complete remodels – depending on the program
The renovation process begins once a home is found. It may even start before finding the house. Either way, it all starts with a discussion of the situation, goals, and options available with our renovation experts. Then the basic process follows like this. The borrower obtains a detailed improvements bid from a licensed and insured contractor. Keep in mind; the borrower may not complete the work. Next, the appraisal is ordered, and the cool thing is that the value is based on the “as completed” appraised value. Using the value after improvements provides a borrower with more equity to use compared to just the current value.
Furthermore, some renovation programs require an extra person in the process called a HUD consultant. Structural improvements or larger projects require the HUD consultant. The HUD consultant is the project leader. He or she ensures the home will be safe, the work is completed adequately, and the improvements are feasible. Now, if the appraiser or HUD consultant (if applicable) comes up with required repairs on top of the contractor bid, they must be added. During the underwriting process, both the borrower and property are reviewed separately. Both will need to qualify.
Renovation Loan Closing
For the most part, a renovation loan closing is like regular mortgage loans. The biggest difference involves holding the renovation funds. On a purchase, the seller is paid prior starting renovations. The closing process looks like the following:
- Purchase/renovation Closing
- Pay the seller after closing
- Set up renovation escrow account
- The contractor may begin work.
So, which loan works best? It depends on the borrower’s profile, the type of renovations, the number of renovations needed, and the home occupancy type. Let’s briefly discuss the renovation loan types.
What Are the Differences Between Each Renovation Loan?
As you will see in the chart below, there are a lot of benefits for each loan type. Options go from very small improvements to a full rebuild of a home. Buyers of a principal residence can buy with as little as 3% down, and this down payment is based on the total of the price and improvements amount. Actually, zero down if a Veteran. Then, investors are also able to renovate a rental property so that it attracts renters as well as the best possible rental income. Check out the chart to see which meets your scenario and goals. Better yet, contact your OVM Financial loan officer.
Download Our Renovation Comparison Chart
Our comparison chart helps to compare the multiple options and requirements for each type of renovation loan. Complete the following information and we’ll deliver the chart to your inbox.