What do you do if you have found your dream home, but just found out that it doesn’t qualify for financing because it needs a new roof? Or what it you have found a home and you love everything about it, except the 70’s style kitchen with the pink Formica countertop? The only way you will buy it is if you can update the kitchen. But how can you afford to do it? These are both instances where a renovation loan may be the answer.
Renovation Home Loans
On a standard conventional or FHA loan you cannot add in extra funds for renovations and repairs. There are products that allow for an “escrow holdback” but these are typically for amount not greater than $5000 to be used for minor repairs. With these loans, up to $5000 is put into escrow at closing and disbursed once the repairs are completed.
However, there are loan products available for home renovations.
FHA Renovation Loans
Under FHA, there are two types of renovation loans, the 203k streamline and 203k full renovation.
The streamline product allows for renovations up to $15,000 and does not include “structural” repairs, adding an addition or a pool. It can be used for things like a new roof, new flooring, and other minor modifications up to the $35,000 maximum.
The FHA full renovation loan does allow for structural modifications and additions, but also does not allow for putting in a pool. It will allow for repairs to a pool up to $1500. The minimum repair amount on the full renovation loan is $5000.
Both loans follow typical FHA guidelines with a low 3.5% down payment and require mortgage insurance based on the loan term and down payment amount. They also must not exceed the maximum FHA loan amount. The renovation loans typically require a higher FICO credit score and usually have a rate of approximately 1/2 percentage point higher than the standard FHA loan, but this may vary by lender. They also can only be used for a primary residence.
FNMA Homestyles Renovation Loan & FNMA Homepath Renovation Loan
On the conventional side there are also two renovation programs, FNMA Homestyles Renovation Loan and FNMA Homepath Renovation Loan. However, the Homepath loan will no longer be available after October 6, 2014 and must be funded by December 31, 2014.
The FNMA Homestyle Renovation Loan can be used for primary, second home and investment homes. The down payment can be as little as 5% and it allows for structural repairs, building additions and the addition of a pool. It also only requires mortgage insurance if the down payment is less than 20%. The Renovation loan also will carry a higher interest rate than the standard conventional loan. The maximum repair amount is 50% of the “after improved value” of the property and there is no minimum repair amount.
There are some additional costs associated with these loans as well, as they may require the involvement of an FHA 203K consultant or additional inspections and title work updates along the way as construction progresses. You should also be prepared for some upfront additional documentation regarding the work to be performed and certification of the contractor chosen to do the work. Each program also has specific guidelines for the timing and disbursement of funds and the period allotted for completion of the work.
These loans can be a good solution for purchasing a home requiring some renovations/additions to suit your needs. For more information on these and other products, contact a loan originator at Marimark Mortgage!