There are a number of reasons why you could require a home renovation loan. You may wish to buy a foreclosed home that’s available at a discounted price, but needs money spent on it to make it habitable. Your existing home may have developed structural problems, which are costly to fix, but which have to be tackled sooner rather than later. Or you may have decided to sell your home, but it needs updating to appeal to the modern market.
What is a Home Renovation Loan?
Up till recently, people who wanted to renovate had to rely on traditional loans, refinancing, or HELOC (home equity line of credit). A traditional loan was difficult to obtain if the property was in very bad repair, because lenders required a property to be habitable before paying out. Now increasing numbers of lenders are able to provide a specialized home renovation loan to improve the condition of a property. There are two main home renovation loan programs: the FHA 203(k) Rehab Program, and the Fannie Mae HomeStyle Renovation Mortgage.
These loans are available from any traditional lender that works with the FHA (Federal Housing Administration).
– Because the loans are backed by the FHA, they can be obtained even by people with a less-than-perfect credit record.
– The loans are only available for dwellings suitable for 1-4 families, not for apartment buildings or multi-occupancy units. They are not available for investors.
– You can obtain a loan with a down payment as low as 3.5% of the loan amount.
– You are able to borrow up to 110% of the property’s appraised value, based on its predicted value when the work is finished.
– The loan amount has to comply with FHA limits, which in most places restrict you to $217,000. In high-cost areas, up to $625,000 could be allowed, rising to $729,750 in some places.
– You cannot use an FHA home renovation loan for luxury items like a spa or a pool.
– You are allowed up to 6 months from the time the loan is closed, to complete the work.
– You have to satisfy the lender that the money has been spent on the house. The money is available in up to 5 draws. You have to hire a consultant, who has to inspect the work at each stage, before the next draw is paid.
Fannie Mae HomeStyle
These loans are available from most major banks, to anyone who already owns a Fannie Mae-approved home, or is looking to buy a home in need of renovation.
– To obtain a HomeStyle loan, you do need a good credit score. Most lenders require a minimum score or 680, and to get the best rates you need a score of at least 740.
– There is very little restriction on the types of property — the loans are available for condos and duplexes, and even for PUDs (planned unit development projects).
– The loans are available for investors as well as owner-occupiers.
– The down payment required is usually at least 5% of the loan amount.
– You can borrow up to 95% of the appraised value on completion.
– The maximum loan amount in most areas is $417,000.
– The HomeStyle home renovation loan does allow for luxury items such as pools, spas, outdoor kitchens, or landscaping — anything that adds to the value of the property.
– You are not required to hire a consultant, but an inspection is required at the beginning and end of the work.
Both types of home renovation loan can be used to refinance an existing mortgage, and consolidate this and the renovation costs into a single loan. Which program is more suitable for you depends largely on your credit record, and the type of improvement you want to make. But nowadays there is absolutely no reason for you to put up with a substandard home.