Rehab - Renew: How To Buy A Home With A Renovation Loan
Tuesday Oct 10th, 2017Share
Welcome to Mortgage Mondays.
A couple of weeks ago I posted that you could ask me me mortgage questions and I would write a post to answer your question. Although I know there has to be many people out there with questions only one person responded to the post with a question. Here’s what she asked as well as my answer and a ton of information on the topic.
I have found a house, but it needs some repairs and the seller won’t be doing any repairs, but it seems like a great opportunity for me and my family. If I want to purchase it, can I get money to help fix it up or will I need to fix it up on my own? Would I even be able to secure financing in its current condition?
The FHA 203(k)* or the Homestyle Renovation loan program may be the answer to secure financing to buy and renovate this fixer-upper home. You get just one mortgage loan. It provides funds for both the acquisition and rehabilitation of the property.
What Are The FHA 203K and Homestyle Loans
The FHA 203K and Homestyle Renovation loans are two little-known mortgage programs that offer solutions for buyers and homeowners who want to renovate.
Both loan programs have been around for years. However, in the old days — when most people could easily get second mortgages or generous credit lines to pay for renovations — these loans weren’t as popular or appealing as they are today.
Both loans can be used both by buyers to purchase a home or by current homeowners to refinance their existing mortgage plus the renovation costs into one loan.
While the demand for these loans has surged in recent years in the aftermath of the housing crisis and the rising of popular home renovation shows. Many buyers saw them as a way to buy and renovate distressed foreclosure properties. Even with the increased popularity, many people are still unaware of the programs or believe them to be too complicated. But it’s not as complicated as it may sound.
Here’s How It Works
Renovation loans allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed.
This happens by basing the mortgage loan amount on the projected value of the property after the work is completed, taking into account the cost of the work. Renovation loans close within the same 30-45 day or less time frame as a standard FHA or Conventional loan. However, the portion of funds used for the renovation are held in an escrow account and released by the lender as repairs and inspections are completed.
You hire a contractor to provide an estimate of the work to be completed. The home is then appraised. The appraiser will take into account the estimate of the work to be completed. The appraiser will provide both an “as is value” and the expected market value of the property after the proposed rehabilitation and improvements are complete.
Renovation loans require borrowers to show that the money was spent on the house. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection before each draw is made. A “draw” happens when a portion of the money is disbursed to the contractor. Borrowers have up to six months to finish the project and are allowed up to five draws.
The HomeStyle program does not require a consultant to monitor the work, only an initial and final inspection.
Real World Example of A Renovation Loan
I helped a couple who bought a home in the Stone Mountain area of Metro Atlanta. Although, their home was a foreclosure it is important to mention this is not a requirement. The couple purchased the home for $156,000. The appraisal estimated that the home would be worth $198,000 after the work was completed. The couple was able to take out an FHA 203(k) mortgage totaling $186,000, which covered the price of the house, renovations, and loan costs, minus a down payment. The couple was able to renovate the home to their specifications as well as having instant equity upon completion of their renovations.
Which Loan Is For Me
Credit Score - Minimum 550
Down Payment - 3.5% (Credit score 580+) or 10% for credit scores 550-580
Occupancy - Owner Occupied
Credit Score - Minimum 620
Down Payment - 5% (Owner Occupied), 10% (2nd Homes), 15% (Investment Properties)
Occupancy - Owner Occupied, 2nd Homes, and Investment
If you have a 740 score and 10 percent down, a HomeStyle is cheaper. That’s because FHA mortgages carry higher mortgage insurance premiums for borrowers who put the least amount down. FHA 203(k) home renovation mortgages have an upfront fee that is rolled into the loan amount.
With the FHA 203(k) loan, you can borrow up to 110 percent of the home’s appraised value, compared with 95 percent with a Homestyle loan. Both appraisals are based on what the house is expected to be worth after repairs.
What Can I Fix
FHA’s 203(k) rehab loan does not allow borrowers to use the money for luxury items such as adding a swimming pool or a spa, however HomeStyle does.
If you need less than $35,000 and don’t have to do any structural repairs or major landscaping work you can opt to go with a FHA 203(k) limited. The FHA 203(k) limited is similar to a standard 203(k) but is easier to obtain and involves less paperwork and bureaucracy as 203(k) limited loans don’t require the borrower to hire a consultant.
If you want to get in touch with your inner Property Brothers find yourself a fixer upper and obtain a renovation loan. We specialize in assisting buyers with finding, buying, and financing your fixer upper and transforming it into your dream home.
Get Started Here To Rehab-Renew Your Dream Home