One of real estate’s best-kept secrets is the Renovation Loan. Renovation loans can help buyers afford to buy and rehab a home. Both the purchase price and the renovation costs are tied into one single mortgage. Your loan is closed in as-is condition, utilizing the after-improved value.
Renovation Loans aren’t just for home buyers – if you currently own a home, you can refinance your home with a Renovation Loan, to pay for improvements.
Here’s what renovation loans can pay for, different renovation loan programs available, and a step-by-step guide to taking advantage of renovation loans.
Renovation Loans – What’s Covered
One of my favorite things about renovation loans is how much is covered. You can use renovation loans to pay for a wide variety of projects, including:
- Energy conservation improvements, including solar panels, sealing/insulation, and other green features
- New energy-efficient appliances
- Major landscaping, including waterwise native plants and trees that can help protect your home from wildfires
- Modernizing plumbing/electrical/HVAC systems
- Decks
- Fencing
- Roofs
- Structural alterations/additions, including adding a garage
- Foundation repairs
- Adding a second story
- Interior and exterior painting
- Flooring
- Updating kitchens and bathrooms
- Knocking down walls
- Replacing windows
- Doors
- Exterior siding
- Miscellaneous repairs
- Permits
- Inspection fees
- Architectural/engineering fees
You usually have up to six months to complete renovations from when you take ownership of the property.
Renovation Loans – Available Programs
All Renovation Loans have a current loan limit of $753,250 in San Diego County. check here for loan limits in other areas.The loan limit varies by County; Here’s a brief description of FHA 203k Renovation Loans, Fannie Mae HomeStyle® Renovation Loans, and Freddie Mac Renovation Loans.
FHA 203k Renovation Loans
FHA-insured renovation loans are for owner-occupied homes only. The minimum down payment is 3.5%. The minimum qualifying FICO score is 640. The loan can be either a 30-year fixed rate mortgage, or a 5/1 ARM (adjustable rate mortgage). For non-condominium properties, the loan can be based on as much as 110% of the appraised value. For example, you buy a $300,000 home and plan to complete $30,000 in renovations. The appraiser values the home with renovations at $330,000. You can apply for a renovation loan based on 110% of that value, or $363,000. So if you put 3.5% down, which is $12,705, the loan amount will be $350,295. Renovation loans for condos are limited to 100% of the appraised value, and can finance interior work only.
FHA 203k renovation loans do not pay for swimming pools, window treatments, used appliances, or luxury items. You have 120 days to complete renovations, and they must begin within 30 days of close of escrow.
Another feature of the FHA 203k renovation loans is the ability to finance mortgage payments. If you can’t live in the home due to the extent of the construction, meaning if the property isn’t habitable, the total mortgage payments during the construction can be included in the renovation loan amount. That’s up to six months of mortgage payments while your home is being renovated!
All FHA loans require mortgage insurance premiums. The mortgage insurance premium is calculated based on the total loan amount. Read my FHA Loan Programs article for information about mortgage insurance premiums and other program features.
Fannie Mae HomeStyle® Renovation Mortgage
The Fannie Mae HomeStyle Renovation Mortgage is a fixed-rate conventional loan. The minimum down payment is 5%. The minimum qualifying FICO score is 620. Fannie Mae HomeStyle can be used for owner-occupied homes, second homes, and investment properties. If you already own the property, you may qualify to refinance with a HomeStyle renovation loan. The maximum allowance for renovations is limited to 50% of the purchase price. For example, if you buy a $300,000 home, the limit on renovations is $150,000. You can apply for a renovation loan based on 100% of the appraised value of the home with renovations. In this example, the total loan amount is based on $450,000.
HomeStyle Renovation loans may cover repairs, renovations, remodeling, or energy improvements. There are no restrictions for any types of repairs, as long as they are permanent fixtures that add value. They can be interior improvements, or exterior improvements, such as fences, decks, landscaping, or in-ground pools. For condos, renovation loans can finance interior work only.
Fannie Mae also offers a HomeStyle Energy loan, which is for borrowers who want to purchase energy upgrades when they buy or refinance. The maximum allowance for energy upgrades is 15% of the “as completed” appraised value of the home. The HomeStyle Energy loan program is available for investors with rental properties.
Freddie Mac Renovation Mortgage
The Freddie Mac Renovation Mortgage may go toward purchases and refinances of single-family residences. There are both fixed-rate and adjustable rate programs. The program will lend up to 50% of the improved value, up to the conforming limit. In addition, you have 120 days from the loan closing to complete all renovations. Unlike the Fannie Mae program, Freddie Mac will accept a non-occupant co-borrower.
Renovation Loans – From Start to Finish
Here’s a step-by-step guide to buying a property with a renovation loan:
1. Choose a lender who offers renovation loans. (Most lenders do not offer renovation loans.) Meet with your loan officer, and obtain your preapproval. You can also read about getting preapproved for a mortgage.
2. Once you receive your preapproval, you are ready to go house hunting. Identify a property that needs renovations.
3. Document your renovation plans. List all the repairs, improvements, and modifications you would like to finance.
4. Obtain estimates for your renovation plans from at least one contractor. Contractors have licenses and bonds, and they must obtain all applicable permits for each project. Be sure that the contractors include all permit and inspection fees in their estimates.
5. Submit an offer to buy the property. Your agent needs to specify in the offer that you plan to finance the property with a renovation loan.
6. When the seller accepts your offer, submit your renovation plans and contractor estimates to your lender. The lender sends this information to the appraiser.
7. The appraiser appraises the value of the home as if all renovations are in place. Your lender approves your renovation loan to include the purchase price, plus the cost of renovations.
8. When you close escrow, the seller pays the purchase price, and the renovation funds go directly into an escrow account, which the escrow officer manages. You arrange for the contractors to begin renovations within 30 days of closing escrow.
9. At the end of the renovations, the contractors submit invoices for payment to the escrow officer. In addition, the renovations must match the lender-approved plans and estimates.
The Bottom Line
Renovation loans are an under-utilized tool in the real estate industry. Home buyers can take advantage of renovation loans to buy a fixer-upper at a lower cost, and then customize it with renovations and other improvements. To that end, current homeowners can also use renovation loans to pay for home improvements.
In addition, you can also read about other ways to finance green upgrades.
Finally, many lenders do not offer renovation loans, but they are available. Contact me with any questions. Good luck!
I couldn’t have written this article without the expert advice of Nick Richardson:
Nick Richardson is a mortgage banker with EZ Fundings in San Diego, California, NMLS #966361. He can help you finance or refinance properties located in California. Nick can answer all of your questions about mortgage programs, with no hassle, no obligation. Contact him at 760-402-6962 or e-mail nick@ezfundings.com.
