Home Renovation Mortgages: What Different Loans are Available for Buyers & Home Owners to Finance a Renovation ?

PerryFConventional Rehab Loan, Fixer Upper, how to finance a home addition, Investor Rental Rehab Loan, VA Renovation MortgageLeave a Comment

In some 4 years of writing my Blog on renovation loans, called Rehab Dollars & Sense, I have not had the variety of renovation mortgages to post about that I have today. In this post, I want to give a summary of the different versions of renovation loans that I have access to today. My goal is to help you sort through various renovation loan options, whether you are a home owner needing funds to remodel your home, or a home Buyer purchasing an outdated or damaged home or an investor looking to buy residential rental properties needing renovation.

Below is an overview of each type of renovation loan with details of what each is best used for, how each can be used and why one may be more helpful than another for a particular purpose. As always I value comments and questions so please submit those any time or give me a call. As a renovation Loan Officer I am able to help clients with their renovation mortgage needs in all states in the U.S.

Let’s begin with new Renovation financing you may not have heard about and finish with others I have covered in previous posts:

  • VA  Renovation Mortgage for Veterans
    • This loan is guaranteed by the Veterans Administration for eligible Veterans to obtain a mortgage to buy or refinance a primary residence with no down payment and now to add funds to the loan to remodel the home. This is significant in that a Veteran can now remodel a home with the same mortgage used to purchase it, all without any down payment. Basically 100% renovation financing. There is a limit on what construction can be done in that no structural changes or additions are allowed, work should be completed in 90 days and the dollar amount of the renovation is limited to 25% of the homes “as completed” value. This can be a helpful option to take a home needing retrofit to accommodate any special needs of a Veteran, all in one loan, one payment.
    • Renovation must be done that will be permanently attached to the property and add value.
    • A contingency reserve or basically funds for unforeseen items discovered during construction will be from 10% of the base budget to 20%.

 

      • An example would be a home purchased for $100,000 needing $25,000 in updates. Updating then gives the home an “as completed” value of $150,000 which meets the 25% limit for renovation dollars. Or 25% of $150,000 is $37,500. The $37,500 represents the maximum renovation dollars allowed on an “as completed” value of $150,000.
      • I have written a recent post on the VA Renovation loan with more detail at http://perryfarella.com/2018/02/va-renovation-loan-added-dollars-remodel-repair-home/ .
  • Jumbo Renovation Mortgage
    • Here the Buyer can be mortgaged to 80% of the “as completed” value of the home. If done as a refinance the home can be mortgaged to 75% of its “as completed” value. The max size of the Jumbo renovation mortgage can be $1,500,000. The dollar amount of the renovation piece of the mortgage can be the lessor of $250,000 or 30% of the “as completed” value. This is a great option for those owning or purchasing a home needing substantial renovation located where the finished or “as completed” value will support a larger budget beyond conventional loan limits in most areas.
    • Renovation must be done that will be permanently attached to the property and add value.
    • A contingency reserve or basically funds for unforeseen items discovered during construction will be from 10% of the base budget to 20%.
    • As an example, a Buyer purchasing a home for $700,000 needing $150,000 in renovation that attains an “as completed” value $900,000 would be limited to a renovation mortgage budget of $250,000. That is the lessor of 30% of “as completed” value or $250,000.
  • Investor Renovation Mortgage 2 to 4 Apartments
    • What is available with this mortgage would be funds for an Investor who owns or is purchasing a 2, 3 or 4 unit property. The down payment must be 25% of the total of purchase price plus needed funds for renovation. Or in other words the maximum loan to value ratio is 75%. This is a great product for an Investor who will not personally occupy the property but instead lease it to tenants or sell it. With this loan an Investor can avoid using a commercial loan that may have terms less favorable or avoid working with so called “hard money” lenders who may have higher costs and very high interest rates.
    • This loan is also available for the purchase or refinance of a second home needing repair funds.
    • Renovation must be done that will be permanently attached to the property and add value.
    • A contingency reserve or basically funds for unforeseen items discovered during construction will be from 10% of the base budget to 20%.
    • The maximum dollars for renovation defaults to $35,000 but can increased by approved exception
    • An example would be an Investor purchasing a 4 unit property for $400,000 needing $100,000 in renovation. The down payment would be calculated off the total of these, or $400,000 plus $100,000 = $500,000. A 25% down payment is then $100,000 in this example.
    • If done for an existing Investor owned property as a refinance the loan works much the same way including the maximum loan to value ratio is 75% of the “as completed” value.
  • HomeStyle* Conventional Renovation Mortgage
    • This is a conventional renovation loan for owners who will occupy a 1 to 4 unit property or for a second/vacation home or eligible condo or for an Investor renovating a 1 unit property.  This loan has flexibility in that it can be used by a first time Buyer with just 3% down, repeat Buyer  with 5% down or an Investor buying a single family home to lease to tenants or sell with 20% down. A conversion is possible to take a 2 unit property and make it into a single family home or vice versa.
      • Renovation must be done that will be permanently attached to the property and add value.
      • A contingency reserve or basically funds for unforeseen items discovered during construction will be from 10% of the base budget to 20%.
      • For an owner or Buyer purchasing a single family home, townhouse or eligible condo the down payment can be as little as 5% of the total of purchase price plus renovation dollars needed (3% for a first time Buyer). For a second or vacation home the down payment is 10% of the total of purchase price plus renovation dollars needed. For an Investor purchasing and renovating a single family house, townhouse or eligible condo the down payment is 20% of the total of purchase price plus renovation dollars needed.
      • HomeStyle has a cap or maximize size on the renovation dollars in the mortgage equal to 75% of the “as completed” value.
      • HomeStyle will allow an owner or Buyer who will occupy the property to add up to 6 months of house payments into the loan. In this way the borrower will have funds to make the mortgage payments while the house cannot be occupied.
      • An example would be a Buyer purchasing a single family home for $200,000 needing $150,000 in renovation, so a total transaction for $350,000. If the home has an “as completed” value of $400,000 then the renovation mortgage dollar cap will be 75% of $400,000 or $300,000. Not a problem with a renovation budget of $150,000 relative to the 75% cap HomeStyle has on that part of the mortgage. You can find many stories in my Blog on HomeStyle I have written with examples and pictures.
  • FHA 203K Renovation Mortgage
    • This loan is an FHA insured renovation mortgage that requires a minimum down payment of just 3.50% of the total of purchase price plus renovation dollars. It is only for owners who will occupy the property for at least 12 months. It is not a loan for investors who will never occupy a property.
    • 203K can be used for 1 to 4 unit properties to purchase and add renovation dollars into the loan. It is a favorite of first time buyer’s due to the low down payment and if purchasing a multi unit property, the rents can be used as extra income at 75% of the gross, to qualify for the loan size needed. In addition to that the property can be mortgaged to 110% of its “as completed” value.
    • A little know aspect of FHA 203K is a 2 to 4 unit Mixed Use property is eligible for a 203K mortgage as long as the owner or purchaser will live there for at least 12 months after closing. The rule is a 51% residential split with 49% commercial split of square footage and no 203k funds can be used to renovate the commercial space. This is an advantage over a commercial loan for some Buyers or owners. I have written about in past Blog posts, one is at http://perryfarella.com/2017/07/mixed-use-property-finance-using-203k-instead-commercial-loan/ .
    • 203K will allow an owner or Buyer to add up to 6 months of house payments into the loan. In this way the borrower will have funds to make the mortgage payments while the house cannot be occupied.
    • Renovation must be done that will be permanently attached to the property and add value.
    • A contingency reserve or basically funds for unforeseen items discovered during construction will be from 10% of the base budget to 20%.
    • An example would be a buyer purchasing a 2 unit property for $200,000 needing $200,000 in renovation so the total transaction is $400,000. The down payment is 3.50% of $400,000 or $14,000. The second apartment is projected by the Appraiser to rent for $1600 a month when completed which will allow for 75% of that or $1200 a month to be used as extra income above borrower’s salary to qualify for the loan size needed. If the “as completed” value is to be the same $400,000 as invested that is fine with 203k. With 203K the owner or Buyer can be mortgaged to 110% of the “as completed” value or in this case 110% of $400,000 is $444,000. FHA is interested in seeing properties brought back to livable standards and so allows the 110% mortgage. I have seen 203K used to help buy many distressed properties and make them great homes for many clients, particularly first time buyers.

 

I hope the brief overview of Renovation Mortgages has been helpful. I have written in more detail in other blog posts about most of these in the past you can refer to. Please send questions or call any time.

Perry Farella      773 793 8803  or  773 248 8422   perry.farella@primelending.com  Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. Not all borrowers will qualify. HomeStyle® is a registered trademark of Fannie Mae.

 

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