As a Loan Officer with many years experiences working with clients who buy and renovate homes, I’m an evangelist for renovation loans in that I have seen how they can transform properties and work well financially for Buyers. In addition, being knowledgeable as a Real Estate Broker with them can be an advantage.
I have also seen there are misconceptions about how the process of renovation financing works and wanted to offer clarity and good news about them that can be helpful to Buyers, Sellers, and Real Estate Brokers. In times when the inventory of homes for sale is limited, a renovation loan makes even more sense. Or owners may wish to rehab prior to listing for sale to sell at a higher price by using a refinance version of a renovation loan.
How many times has a Buyer been looking for a new home in a preferred area or school district only to not see anything for sale that is appealing? Or passed on a home because the kitchen wasn’t perfect or the baths were old? A renovation loan can be the answer in that it will allow the Buyer to add in dollars needed to make it their dream home, all with one loan and one payment. These loans will use the “After Renovated Value” (ARV) to approve the mortgage rather than what the home sold for or is worth now. That is a huge advantage in that the Buyer knows what the added equity will be before closing on the purchase. I always say “buy the worst home in the best area” because the other better homes will help raise the “as completed value” of a renovated home. An Appraiser takes the details of the renovation costs from a General Contractors written proposal and appraises the house using comparable rehabbed homes rather than condition a house is in currently, to arrive at “After Renovated Value” (ARV) to approve the loan.
To express it in cost at today’s typical mortgage rates, it will cost about $5 for each one thousand dollars each month, in payment, on a 30-year term loan for the renovation funds. If a new kitchen is added to a mortgage when purchasing a home and the kitchen cost is $10,000 then the 30-year monthly payment is raised by about $50. Plus the homeowner can use the new kitchen now and know what value a new kitchen added to the home, prior to closing on it, with a renovation loan. Or if a home needs a $50,000 renovation, that will add about $250.00 to the monthly payment on a 30-year term loan.
- Here are the different types of renovation loans available which function as described above:
- HomeStyle Conventional – Down Payment minimum 5% for an owner-occupied home; 10% down for a vacation home; 15% down for an investment home to fix and rent out; 20% to 25% down for 2 to 4 unit buildings
- VA Renovation – for Veterans & Active Duty Military- 100% financing, no down payment
- Jumbo Renovation – Down Payment 20% to 25% with loans up to $2 million dollars for a home
- FHA 203K – Down Payment minimum 3.50% for 1 to 4 unit properties, owner-occupied only
In the past it may have been these loans took a long time to close and so fell out of favor. Today the process is streamlined and can take 30 to 45 days from loan application to a closing commonly. The process itself for a renovation loan involves 6 basic steps as below:
- Buyer finds a home and gets under contract for it or already owns the home if done as a refinance.
- Lender’s Construction Consultant visits with Buyer to inspect the home for repairs that fall into 3 categories- Mandatory, Recommended & Desired.
- “Mandatory ” would be items such as holes in roof or walls, or anything that would be dangerous and prohibit safe use of the home.
- “Recommended” would be items the Consultant sees that may wear out soon like a roof that has a year left to it or older less efficient windows with drafts.
- “Desired” would be items such as new kitchen cabinets & counter tops, opening a wall between kitchen and living room, re-finishing wood floors or anything new the Buyer wishes to install as part of the renovation.
- A Scope of Repairs report document is prepared by the Construction Consultant defining all repair items with one of the 3 above categories(M,R,D) along with a projected labor and material cost for each that may include Architect Plans cost or Building Permits cost if needed.
- Buyer visits the property with General Contractor(s) who will see a version of the Scope of Repairs document that has all rehab work tasks listed but not projections of expected costs so Contractor can make an honest proposal to execute exactly that rehab work, but not be biased with seeing expected cost projections.
- Buyer selects a Contractor and Lender will check licenses, insurance, etc. to be sure the Contractor can handle the job.
- Buyer has signed a loan application with Lender which includes funds for the rehab in one loan & authorizes an Appraisal report to be done.
- Lender orders an Appraisal based on the Contractors written description with costs for all and property is appraised to its finished or “After Renovated Value” (ARV) to approve the loan to close.
- The loan is closed, Seller is paid off, Realtors receive any commissions due and Contractor begins renovation work with costs for all work and property is appraised to its finished or “After Renovated Value” (ARV) to approve the loan to close.
- The loan is closed, Seller is paid off, Realtors receive any commissions due and Contractor begins Renovation work after closing with typically 6 month’s time to completion.
As stated earlier I’m an evangelist for purchasing homes with renovation loans because I have seen Buyers be successful with single family homes, 2 to 4 unit buildings and investment homes to lease using them. It really can be one loan, one payment, one dream home. There are many stories and examples in my renovation Blog, Rehab Dollars & Sense at perryfarella.com/blog. I hope this article has been helpful and encouraging to those who may have thought purchasing a home to renovate was too complex or beyond their ability to afford or manage. I’m always happy to answer questions.
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firstname.lastname@example.org 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.
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