Buy AND Renovate with One Loan
How to Get the Best Mortgage Series – Week 7
Follow this series to learn how to get the best mortgage for your specific financial situation and goals. You’ll see what steps you need to take throughout this process to make it productive and successful.
This week you’ll learn about a loan that can help you buy a home and renovate it as well. It’s an affordable mortgage option out there that you should know about, especially if you buy a home that you plan on renovating.
Maybe you’ve seen a home that you love but it was more fixer-upper than move-in-ready. Dated kitchen, not enough bathrooms or no open floor plan — but it had a location you just love.
Don’t cross it off your list! Whether you envision a big renovation or something on a smaller scale, there is a way to finance it.
You can roll the mortgage and the renovation costs into one safe, manageable FHA 203(k) loan or a Homestyle Renovation Loan. (Even homeowners can refinance and renovate with these loans.)
These renovation loans are great options for those of you who don’t have a lot of cash and want to buy a home that needs work. There are two types of loans offered: a Standard and a Limited (for projects that cost $35,000 or less).
Remember that these loans can take more time, with lots of preplanning and required paperwork, so make sure you know what you’re getting into first. I recommend budgeting about 45-60 days to from the time you are under contract to the time you get to the closing table. The renovations will start after you close on the home, and you typically have 6 months to complete the work. But it will be worth it once you own the home you love (or will love even more once the work is done!).
What’s the Cost
Here’s a simple breakdown for a renovation loan:
- The total acquisition cost = the sales price + the total cost of renovation
- That total acquisition cost is what your mortgage will be based on.
The minimum down payment on a 203k renovation loan is 3.5% and the minimum down payment on the Homestyle renovation is loan is 3% or 5% down.
There are several other charges that will be added to the renovation costs and included in the acquisition cost. In addition to the contractor’s work estimate, a 10‐20% contingency reserve is required. In addition to the contingency reserve, inspection fees, title updates, permits and consultant fees must all be included.
After your closing, the total funds required for the renovations are held in an escrow account and are released as the work is completed. Any funds left over are used to reduce the principal balance.
What Homes You Can Buy
As long as the home is more than a year old, you can choose a single family, townhome, or condo unit (condos need to be FHA approved for the 203k loan).
Once you see a home you like, you would write an offer just like you would on any other home. Just be sure to indicate you will be using a renovation loan for financing.
Be sure that your real estate agent is familiar with renovation loans to ensure that the purchase offer and closing process go smoothly.
Fix It Up — What’s Eligible
Renovations loans covers a wide range of repairs: Major jobs — a kitchen remodel, new roof, adding a second story, a complete teardown— and more cosmetic upgrades — replacing carpeting, new windows or new deck.
The extensive list also covers repairs for termite damage, mold problems and other safety issues.
And if the home doesn’t have air conditioning, don’t worry, this loan will can cover it. Even energy conservation improvements such as insulation or new energy efficient appliances are eligible.
The renovations, however, must include all mandatory repairs required to allow the property to meet all guidelines for your loan type.
Timeline — First Things First
Here’s a good overview of what you need to do and when:
- Applications must be submitted through an approved lender, like us! You’ll need to get prequalified to see how much you can borrow.
- You should be interviewing contractors during this time to find a reputable business to work with you. It’s recommended to have your contractor ready to go so that you can bid on a home quickly. (Note: your contractor cannot be related to you)
- Once you make an offer on a home, you’ll get a ratified contract allowing 45-60 days for settlement to allow you to finalize renovation estimates with an approved contractor.
- You will meet with a HUD Consultant who will provide you a scope of work with estimates costs and a scope of work with no costs listed. You provide that to your contractor to put together and finalize your bid. The bid or job report will need to provide an itemized list of all the work to be done with a cost estimate for each item. It includes a site plan and architectural exhibits.
- When the bid is finalized and approved by the HUD Consultant, the appraisal will be ordered. The appraisal will be completed based on the after-improved value.
- Once the loan is approved with the final amount and you close on the home, the contractor has 30 days to begin work with a maximum time frame of 6 months. The HUD consultant will inspect the work as it is completed and will let us know when to release the funds each time to your contractor.
Limited Loan for Smaller Projects
The Limited version is a simplified version of the Standard. It can be used for renovations that don’t exceed $35,000 including contingency, inspection and title update requirements. It is perfect for smaller projects that do not include any major remodeling.
It is also simplified because it does not always require a HUD consultant.
A renovation loan is a perfect option if you think your dream home is beyond reach. It can help you get the home you ultimately want with less cash than a standard loan. To find out if this would be a good loan option for you, reach out to me and I can help you determine if you are eligible for this type of financing, Just email me at firstname.lastname@example.org to get started!
I'm Jordan and I love helping first time home buyers make their first home more affordable and stress-free! It all starts with your personal budget and how much you can comfortably afford. Let me know how I can help you make your real estate dreams come true.
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