There are numerous advantages to buying a home with a renovation mortgage. Homebuyers can purchase a property that needs renovation, and add funds for the renovation to the mortgage.
One of the biggest advantages of a renovation loan is that it allows homebuyers to purchase the home with a mortgage, and do the renovation after closing.
There are many undesirable alternatives to renovation loans, which you will better understand as Mary talk about this type of mortgage in the video.
Hello, I’m Mary Catchur. I’m the owner of Marimark Mortgage. Today I want to talk to you a little bit about a renovation loan.
So, what is a renovation loan, and why would you ever use one? Have you ever gone out looking for a home and found the perfect property? If only maybe the kitchen was updated, or if only it had a pool, or jeez, if only it didn’t have that leak in the roof. That’s when a renovation loan might come in handy.
On a regular standard conventional loan, property issues that are considered to be health and safety issues, like a leak in the roof, you cannot use a regular conventional loan to do that. You can use a conventional loan for just standard remodeling issues, but then you’re going to have to do that remodeling work after you close the loan, and get a home equity line to do so. So, this is where a renovation loan really comes in handy.
FHA and Conventional Renovation Loans
There are renovation loans under both FHA and conventional programs. They vary in their terms and what you can do under them. For instance, an FHA loan would not allow you to install a pool.
So, how does a renovation loan work? Well, before we can even begin the loan process, there’s a lot of work that needs to be done up front. If you go with an experienced lender, that knows exactly what needs to be done, and has contacts with people that need to do the up front work, that can really help the process to go a lot smoother.
Determining the Loan Amount
One of the things that needs to be done up front is before we can even determine a loan amount, we need to figure out exactly what the renovations or repairs are going to be to the project. At this point, you will use a HUD consultant.
The HUD consultant is basically an inspector, but they have additional certifications that allow them to do these renovation loans. So you want to make sure, before you get a home inspection, that you’re actually using a certified HUD consultant to do that. Again, your mortgage lender can point you in the right direction on who to use for that.
So, the HUD consultant will, basically, perform an inspection of the home. They will look at the things that need to be done that are safety and health issues, and then they’ll also look at the upgrades that you’d like to do and they will come up with a feasibility report and a plan for how those are going to be done.
At that point, then, a contractor is brought in. The contractor, again, should have experience with doing this type of loan, because there are a lot of requirements up front for them. They need to provide their history, their licenses, their insurance information, so it’s a lot of gathering of information up front. Again, using a good HUD consultant, they can sometimes help point you and connect you with the right contractor to help you prepare this report.
So basically, the HUD consultant and the contractor will work together to determine exactly what needs to be done, and they come up with pricing and a basic plan for how these renovations are going to be made.
Once that’s all complete, and everyone has agreed to it, then we can begin the loan process.
In order to determine the loan amount, we’re going to base that on what we think the appraised value is, after the repairs are made. Then, your loan will be based on the allowable percentage loan to value of that after-appraised value. When the appraiser goes out to appraise the property, he will also have a copy of the feasibility report and contractor’s report and know exactly what’s going to be done, so he can give us a value on the after-appraised value.
At that point, then, we submit the loan and the feasibility report and all of the contractor documents to the lender for preliminary approval. From there on, this works basically like any other loan process. You’ll close your loan, as you would any other loan, and then the construction begins. At that point, it works like a mini construction loan, where there will be draws provided to the contractor as the work progresses.
Advantages of a Renovation Loan, Though Interest Rates a Little Higher
One of the disadvantages, other than that initial upfront work, is that the interest rate is going to be a little bit higher. But, many borrowers still like to do this loan when they compare that to the amount of work they’d have to do after buying the home and either moving into it and then trying to do those repairs, or as I mentioned earlier, sometimes you can’t even get a loan on a house that needs repairs. So this can be a great product for you if you find that home that just needs a little bit of work.