Some buyers find themselves frustrated with homes that are currently available not meeting their needs. Renovation loans may be what you are looking for to Personalize and Customize your next home. They open up different opportunities that may otherwise be overlooked.
Renovation Mortgage Basics
Renovation loans are not a new concept. They have been around for a long time, however most buyers don’t even consider them. Buyers often have a very good idea of what they are looking for in a home. Sometimes it may seem as though you are trading off some of the things you want in a home to get what you need. In 2018, housing inventory was fairly low and finding a home that checked off all of your “Must Haves” may have been frustrating.
Renovation loans allow you to choose a home that is almost there and Personalize and Customize it to what you want. There are several programs that allow you to do this, but all of them will allow for updates to kitchens, bathrooms, flooring, and even a pool in some cases. For instance, if you find a home from the 80s that is in the area that you want and is the size you are looking for, you can get rid of all of the 80s finishes right after you close. This is all done in one loan so you don’t need to worry about drawing on home equity later.
How many homes have you seen that you could make your own but were hesitant because of the repairs needed?
Reduced “Entry-Level Home” Inventory
Looking at data from Northeast Florida MLS there were some major changes in 2018 compared to 2017. I compared homes with 3 to 4 bedrooms ranging from $100k to $250k. This is the typical entry level home for the area. Overall the number of new listings in this category dropped from 684 to 499, or 27%. The number sold dropped by 18%. There was only a 4% increase in average sold price, from $194k to about $203k. In Nassau County it was more drastic with a reduction of 57% of new listings in this category.
With that said, there were fewer homes on the market which means less chance to get the home you are really looking for. Most sellers are not in the financial position to upgrade or update everything. Additionally, if they chose the finishes, what are the chances it will be exactly what you are shopping for? If you are able to get the home for the right price in the right area, would you want to customize and personalize it?
FHA 203(k) Loans
The Federal Housing Administration 203(k) loan is available to buyers and owners alike. This loan will allow for renovations to be completed on a home after closing even if the home does not meet some of the guidelines of a standard FHA mortgage. This loan is available with credit scores as low as 500 with 10% down and will require a minimum of 580 for a down payment of 3.5%. Repairs will be done with the help of a HUD consultant to assist in getting bids and inspection of the work. Financing can include:
- structural alterations and reconstruction
- modernization and improvements to the home’s function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvements
There are still basic energy efficiency and structural standards, but some of that can be met in the improvements covered. Homes must fall within the FHA lending limit for your area, which can be found here.
Homes that require fewer improvements may be eligible for an FHA Limited 203(k) loan. This is also open to both buyers and owners. The cost of rehab is limited to $35,000 and can cover the same improvement types. This program also removes the requirement for a HUD consultant for repair budget.
Fannie Mae HomeStyle Renovation Loan
This is a Conventional Loan product. It allows home buyers to customize and personalize their new home to suit their needs. There are few limitations on the improvements that you can select, but must be permanently affixed to the home or property. Renovations must be completed within 12 months of purchase. The loan will be limited to 97% loan-to-value utilizing the lesser of Price+Renovations or the “As Completed” appraised value.
Some work may be Do-It-Yourself, provided it does not exceed 10% of the completed value. Also, any work exceeding $5,000 must be inspected. The reimbursement is limited to materials not labor, but this may be a way to save money on some of the simpler projects you want to complete.
This may also be combined with a HomeReady conventional mortgage if you meet the lending guidelines. This could allow for lower interest rates and cancellable Private Mortgage Insurance(PMI) once you meet the requirements.
VA Renovation Loan
This is an amazing product for both Active Duty and Veterans. The rehab/renovation loan falls under mostly the same guidelines as a VA New Construction Loan. The lender is required to establish the account that is used for alterations and repairs. This will be drawn upon to complete all of the work. The appraisal will be done based on the completed repairs so that up to 100% financing is allowed based on Notice of Value. A final Notice of Value will be issued after repairs and the VA Loan Guarantee will be put in place. Any costs above the initial Notice to Value would be required prior to closing as well as any changes made after closing that increase costs. The program does not require a contingency reserve, however it may be put in up to 15% of renovation cost. Any funds remaining after the work is done are normally applied to principal on the loan.
There are several “deal breakers” that can arise during a VA Appraisal on a normal purchase. Since the program is designed to protect veterans’ investments, this can be inconvenient and good at the same time. The renovation loan can be utilized to help a home meet the lending guidelines and get the home you really want.
Mistakes to Avoid
These programs can open a lot of doors for you when you are shopping for a home. There are some things you want to consider while planning and shopping:
Get Detailed Cost Estimates – This will prevent you from going over your renovation budget. Make sure they include materials, labor, and any permits that will be required. Your loan will be set at closing and you will be responsible for overages. Spend the time early planning projects to avoid headaches down the road.
Don’t Over Improve the Home – Research the area you are shopping in or have your REALTOR help you. Home improvements will already have a limited return on resale. If you over improve your home, it may be difficult getting any of that investment back later. Marble floors may not be the norm in your new neighborhood, so it will make it harder to find comparable sales and a good valuation.
Have an Open Mind – Sometimes it is hard to envision what a home will be like when it is yours. Walking into homes that need a lot of work may be daunting and turn you off of them. They may otherwise be exactly where you want to live. Imagine how you can Customize and Personalize that home into what you want.