What is a Renovation Mortgage Loan?
Think of your dream home. Really think about it. Does it include a modern kitchen? A cozy den with a place to read? Maybe you’re thinking of the perfect home theater for movies or sports, adding a second story or adding a room to your home. Whatever your dream is, how do you achieve it with today’s housing stock?
Traditionally, many home buyers think of buying a fixer upper and putting “sweat equity” into it. This of course means you have to find the time to do the work (goodbye evenings and weekends), ask for help if you aren’t a builder, find the finances to pay for it (credit cards, store credit, slowly gathering cash, hope for a home equity loan) and keep the excitement of your dream alive.
Another option you may not realize even exists is a renovation mortgage. This option allows you to borrow money based on the after-improved value of the home directly in the mortgage. Here’s why this is so great: The finances are amortized into the mortgage so it’s affordable in monthly payments, it’s part of the low interest rate of your mortgage and you get to pay for a professional to do the work correctly and timely.
With interest rates where they’ve been for the last few years, for every $1,000 you roll into your mortgage you’ll only pay about $6 more per month on your house payment. So if you want a $20,000 kitchen upgrade, you can plan for about $120 more per month. Not too bad!
What are my renovation loan options?
Depending on the programs a lender offers, you have a few choices for financing your dream home remodeling goals. Here’s a look at a few popular options: FHA 203k Standard, FHA 203k Limited, Conventional HomeStyle Renovation.
The FHA 203k loans are essentially the same product, with differing requirements or allowable repairs. With this loan, you can borrow up to 96.5% of the appraised value – based on the value when the improvements or repairs are completed – to purchase (or refinance) a home and complete the renovations. Here’s a look at the differences between the Standard and Limited 203k.
• Structural Repairs. Something as big as jacking up your house to replace the sill plate or moving a load-bearing wall would fall under the Standard 203k. So would knocking the house down to rebuild it, as long as you leave the foundation.
• HUD Consultant. The Standard 203k requires a HUD consultant on the loan. This person draws up the paperwork and works with you and your contractors to get a write-up before the appraisal. The Limited 203k does NOT require a HUD consultant (although arming yourself with an experienced consultant is a good idea that can save you money in the long run).
• Cost. The allowable cost of renovations for the Limited 203k is $35,000 MAX. If your repairs and renovations go above $35,000 then you need to get into a Standard 203k loan.
The HomeStyle Renovation mortgage enables a borrower to obtain a purchase transaction mortgage or a limited cash-out refinance mortgage and receive funds to cover the costs of repairs, remodeling, renovations or energy efficient improvements to the property.
There are no required improvements or restrictions on the types of repairs allowed. Repairs or improvement, however, must be permanently affixed to the real property and add value to the property. Conventional HomeStyle loans have requirements for the total loan amount of your mortgage and the amount of repairs that can be done.
When HomeStyle is used for energy-related improvements, borrowers are required to obtain an energy report to identify recommended energy improvements to the property and the estimated cost savings associated with those improvements.
With a 10% down payment you can add your taste & style to a house to make it your home with remodeling projects like a new kitchen, bathroom, room addition or energy efficient upgrades. HomeStyle Renovation allows you to buy a home and fix it up, or refinance and remodel your current home.
As you can see, renovation loans can be a great tool to help you achieve your goal of a dream home. Hopefully you get the chance to roll out the welcome mat and enjoy your home!
For more information contact :
John Insco, Amerifirst Home Mortgage
NMLS # 218071 OH LIC#OHLO.028023.002