Renovation Loans - which one is right for you?

If you have been shopping for a home recently, you have probably been in a few that could benefit from some TLC.  A renovation loan may be just the thing to turn those homes that have been neglected into the home you've always wanted.  Many homes on the market are in some state of disrepair since the owners who have either had to resort to a short sale or a foreclosure haven't had the money or incentive to maintain them.  Even homes that are sold as an equity sale may have design choices that aren't in alignment with your tastes.  So what do you do when you find the perfect home in terms of location, size and floor plan but it is in need of a serious makeover?  You make it into the home of your dreams with the right renovation loan.

There are a few renovation loans to choose from.  FHA has the 203(k) Full and Streamline.  FNMA has the HomeStyle Renovation loan and the HomePath Renovation loan.  The FHA loans are great because the same guidelines apply to these loans as they do to regular FHA loans which means your credit doesn't need to be quite as good as it would for a conventional loan and your job history doesn't need to be as established either.  The streamline version of the 203(k) allows for up to $35,000 in repairs which can include financing the purchase of new appliances (fridges, AC units, water heaters, etc.) along with other energy efficient items.  Borrowers who choose this option usually replace the flooring and countertops, refinish the cabinets, repaint the inside walls and purchase some appliances.  The Full version of the 203(k) allows for more extensive renovation including adding on to the house or reworking the existing layout.  Both types allow for roof, plumbing and electrical repair.  This video will go over the details of the FHA 203(k) Streamline loan and here is one great example of a home makeover that was financed by the FHA 203(k) Streamline loan.

The FNMA HomeStyle Renovation loan is a great loan for borrowers who can qualify for conventional loans and want a loan that will allow them to improve the outside of the home in case you want to add a pool or a patio (very few lenders have access to this loan - we do).   The HomePath renovation loan is limited to homepath loans only so I want go into any detail about them here.  When deciding on what home to buy, your choices come down to whether you are happy with it as it is or whether you would like to make it just the way you want it by using a renovation loan.  Which loan you choose to finance the renovation will depend on several factors that need to be discussed with the loan consultant.  If you are considering a home that you plan to make some improvements to, I would highly recommend using a renovation loan as compared with trying to finance the repairs with a credit card.  Some advantages of a renovation loan include:

1. No appraisal contingencies for deferred maintenance - sellers love this,
2. less competition because many buyers won't consider homes that need much work,
3. lower initial sales price and more possibility for price negotiation,
4. renovation can occur before you move in by a licensed contractor,
5. interest you pay on a mortgage may be tax-deductible as opposed to the interest paid on a credit card which isn't.

One final consideration when choosing a renovation loan as compared to a regular mortgage is who's going to do the repairs.  The videos above go into more detail about this but if your loan consultant has a good relationship with a reputable contractor, that would e the preferable route since that contractor probably knows the timeframes of the loan and what is required so that the loan can be closed in a timely manner.  Check out the videos and see if a renovation loan is right for you.  If it is and you live in Nevada or California, I would love to help you with the financing.  Feel free to comment and share with your friends or clients.