What do you do if you found your dream home but just found out it doesn’t qualify for financing because it needs a new roof? Or what if you have found a home and love everything about it, except the 70’s style kitchen with the pink Formica countertop? The only way you will buy it is to update the kitchen. But how can you afford to do it? These are both instances where a renovation home loan may be the answer.
Renovation Home Loans
You cannot add extra funds for renovations and repairs on a standard conventional or FHA loan. Some products allow for an “escrow holdback,” but these are typically for amounts 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 complete.
However, there are loan products available for home renovations.
The FHA 203(k) streamline rehabilitation loan allows borrowers to purchase or refinance a home that needs work, allowing them to roll renovation costs into the mortgage. Borrowers will receive a loan that covers both the purchase/refinancing and the cost of renovation upgrades, letting borrowers pay for renovations over time while paying down the mortgage. While the loan has a minimum down payment and credit score requirement and covers mortgage payments if the home is not livable during renovations, borrowers cannot use the FHA 203(k) loan for investment properties. The loan also requires FHA mortgage insurance.
The FHA 203(k) streamlined loan allows homebuyers and homeowners to finance up to $35,000 into their mortgage for upgrades and improvements.
Fannie Mae Homestyle Renovation Loan
The Fannie Mae Homestyle Renovation loan has a down payment of as low as 3% if borrowers plan to live in the home and are first-time homebuyers.
The Fannie Mae Homestyle Renovation loan allows borrowers to complete projects such as new floors, new landscaping, a kitchen remodel, or mechanical upgrades, such as electrical or HVAC upgrades.
This renovation loan is available as a 30- or 15-year fixed-rate mortgage or an adjustable-rate mortgage with a minimum of 620 credit score required to qualify.
Freddie Mac Choice Renovation Loan
Like the FHA 203(k) and Fannie Mae Homestyle loan, Freddie Mac’s CHOICERenovation loan allows borrowers to roll the costs of repairs in the monthly mortgage. The CHOICERenovation loan comes with low down payment requirements, and borrowers can finance renovations that cost up to 75% of a home’s value as long as they qualify for the total amount.
When developing the CHOICERenovation loan, Freddie Mac had four types of people in mind:
- First-time home buyers.
- Homebuyers who have few new homes to choose from.
- Senior homeowners who need accessibility improvements.
- Multigenerational households need to customize a home to fit their needs.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, refinance loans, reverse mortgages, and FHA, VA, and USDA mortgage options. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
Updated on November 29, 2022