Renovation Loans
One of the gems in a wide mortgage product menu are the unique products we can use renovation lending. These are loan products whereby borrowers can secure monies for BOTH the purchase, in addition to monies for rehabilitation, updating, and even expansion of their property. Being able to do this with one closing and having loan-to-value calculations based on the property’s projected after-improved value provides qualified borrower’s with options limited only by their imagination. (The programs are also eligible for refinance transactions.)
There are two primary products in the marketplace. Both require more paperwork than normal loans, as lenders are looking at more than income, assets, credit, and appraisals…we are looking at cost estimates, evaluating the contractor, analyzing budgets and timelines. But, if your team is experienced, these loans can close in similar timeframes to standard loan products. The crucial component is the contractor, their grasp of the program requirements and logistics.
The loan proceeds are managed this way. At closing, funds are released to satisfy the seller. The funds for the renovation are put into an escrow account. From there, work is completed (per a pre-agreed to schedule between your contractor and the lender’s representative). After work is completed, the lender inspects the work. The borrower signs off, and funds are released. Depending on the scope of the work, there can be one or up-to five inspections.
The FHA program is called the 203K. Some of the highlights of their program are:
· Must be owner-occupied, 1 to 4 family home. They also allow some mixed-use properties with restrictions (call to discuss). Typical FHA credit and income ratio standards apply.
· Technically, the total loan amount can go as high as 110% of the after-improved value; but. Is also limited to 96.5% of the combined purchase price, renovation work, and some closing costs.
· There is a minimum of $5000 in work that should be structural in nature. Or address health & safety concerns. After that, there is tremendous freedom in what you can do…replace a dated kitchen or bath, build an extension, and more. The guidelines require the existing foundation and one wall must remain from the original structure; so, even homes devasted by a fire can use the program. Be aware that any work that requires Town approval needs to be secured prior to closing.
· If the total renovation is less than $35,000, lenders can simplify things a bit; and may even choose to release some of the rehab money BEFORE the work is completed. Talk to your loan officer about a Streamline 203K.
· In a major renovation, where the property is uninhabitable, lenders can finance up to six mortgage payments into the loan; so, the borrower has liquidity to pay for housing elsewhere.
· Luxury items (installing a pool or basketball court) are not allowed to be financed.
The conventional version is called the HomeStyle Loan. Largely similar (with different mortgage insurance and credit standards), there are some differences of note:
· The loan to value is lower at 95%
· Luxury items, if the appraised value permits, are finance-able
· Investment properties can be done at significantly lower loan-to-values
There are other nuances, requirements, and wrinkles, you should be aware of…but, that is what your loan officer is for! Make sure your loan officer is experienced in the programs, and you will save yourself a lot of time and frustrations.
