Renovation loans

I recently attended a seminar, hosted by a local bank, to learn more about renovation loans. I had some familiarity with 203K loans (more on those later) and knew that buyers could roll in the cost of renovations into their mortgage. However, I mistakenly thought these sorts of loans were only for big projects, houses in need of major rehabbing. The long and short of it is that you can get a renovation loan for anything from a kitchen remodel to a whole house rehab to a pool and everything in between.

Renovation loans are not for everyone, you will have a slightly higher interest rate and additional fees. In addition to the standard closing fees, there will be a one time lump sum processing fee ($525-$900 depending on the product). The process is a bit more complicated than with a standard home purchase, and renovation loans are only for residential real estate (1-4 units). But in the right situation, they can be a great way to borrow the money you need to both purchase and fix up the house of your dreams. A renovation loan is one loan for both the purchase and the repairs. The bank appraisal of the property takes into account the estimates from a contractor(s) that you provide, outlining the planned improvements and requiring that the house will appraise for what the appraiser expects it to be worth post renovations. Repairs are completed post closing and the contractor is paid by the bank, according to a predetermined payment schedule. As the buyer, you are responsible for finding a contractor to provide the written estimates for the work you want completed. The contractor will need to abide by the bank’s payment schedule and to provide liability insurance, a W-9, and any permits required by the municipality. Wrangling the contractor(s) is probably the most difficult part of the process, as they are not known for their paperwork skills.

There are several different types of renovation loans and each has slightly different specifications. Many, but not all, banks offer them so it’s best to talk to your lender about the details but here’s a bit of information about each type:

Conventional financing renovation loans

• Called Homestyle or EZ Conventional, these are Fannie Mae products
• Only 5% down payment required
• 75% of the “as completed” appraised value of the home can be borrowed
• Can be used for structural or cosmetic projects on primary home, second home or even an investment property
• You have 180 days to complete the project (60 days for the EZ Conventional)

203K Full and Limited

• These are FHA products
• Full is for renovations over $35,000 and Limited is for those under $35,000
• Require 3.5% down payment
• Can include up to a 6% seller concession
• 6 months to complete the project
• Full version requires oversight by a HUD consultant (additional $1000 fee)
• Have to occupy home within 30 days of closing (for Limited only)

VA renovation loan

• 100% financing with closing costs and renovations rolled in
• Renovation costs can’t exceed 35% of appraised value
• Has to be a single family, primary home
• Borrowers can not do the renovation work
• 6 months to complete the project

While not for everyone, if you have been shying away from homes that need updating because you don’t have the cash to pay for the renovations, it might behoove you to explore the renovation loan options and see if that’s a good choice for your situation.