RENOVATION MORTGAGE: What Lenders look Out For

A renovation project can be costly, as old properties can reveal a variety of unexpected shocks, not all of which are pleasant. Even for those who begin their home renovation with substantial money, the majority of people will need to consider a renovation mortgage at some point during the project. When it comes to financing, renovators’ options vary depending on their particular circumstances and the type of project they’re working on, but a renovation mortgage is absolutely worth checking into. The bulk of high-street lenders would only give mortgage on a property that is already habitable, putting many renovation projects on hold.

What Is A Renovation Mortgage Loan?

A renovation mortgage loan enables borrowers to buy the property they want while also paying for the upgrades and repairs they want. The loan can then be repaid over time with manageable monthly installments, much like a traditional 30- or 15-year mortgage.

Renovation mortgages pay for professional work, allowing repairs — both critical mechanical upgrades and cosmetic changes – to be completed swiftly, efficiently, and frequently at a cheaper interest rate than other loan types.

How Does A Renovation Mortgage Work?

You could believe that because a renovation mortgage is paid off over 30 or 15 years, you have the same length of time to complete the repairs. The main difference between a renovation mortgage and a traditional mortgage is that borrowers can use the money for whatever repairs they want, but they must complete the work in a timely manner (typically within 6 months to a year of closing).

Many measures are also in place to ensure that funds set aside for improvements aren’t diverted to the purchase of a houseboat or a second vacation home.

The mechanics of a renovation mortgage vary depending on the lenders and program, but here’s a high-level overview: You’ll look for a lender that provides this form of loan and apply. You must meet specific qualifying criteria, such as a good credit score, consistent income, and proof of work, in order to be approved. Then you’ll choose a professional contractor to come to the property and give you a bid for the project (whose credentials must be checked by the lender).

The lender then assesses the home’s “as-is” value as well as an “after-repair value,” which takes into account the improvements you intend to complete with your contractor. The bank will use the after-repair value to decide how much you can borrow on your renovation loan.

Example:

You’re buying a home for $120,000, but it needs a lot of work. The contractor estimates that the home will require $75,000 in aesthetic improvements.

You’ll close on a $195,000 loan at the end of the process. The lender will reimburse the seller for the home’s value. The remaining $75,000 for the project, plus a 10% project contingency, was then placed in an escrow account.

You’ll collaborate with your contractor to set project milestones at which they’ll be able to withdraw funds from the escrow account for the task. Let’s say the project will take four weeks, and you agree that they can take money out each week if they complete a particular amount of work each week. Plumbing, for example, was completed in week one, painting in week two, and so on.

Someone from the lender will come to verify that the work is finished, you and your contractor will sign documentation, and the money for that milestone’s draw will be disbursed from the lender.

Mortgage Options for Renovations

Because renovation loans aren’t used as frequently as other mortgage products, there are only two basic renovation mortgage loan options available. (At this time, Rocket Mortgage does not offer renovation mortgage loans.)

#1. HomeStyle Renovation Mortgage from Fannie Mae

Fannie Mae has been attempting to extend eligibility for the Fannie Mae Homestyle Renovation Mortgage in recent years, as well as streamline servicing and approvals.

Fannie Mae’s underwriting eligibility standards must be met by borrowers.

Renovations are limited to 75% of the ARV (after-repair value), which is equal to the purchase price plus project costs (whichever is less.)

Contractors can get up to 50% of their material expenses paid for upfront with this loan.

The initial after-value appraisal, completed prior to finalizing the loan, is the only appraisal required.

If a home buyer wants to combine a renovation project mortgage with their new HomeStyle loan product for energy upgrades, Fannie Mae is offering incentives.

#2. 203(k) Rehab Loan from the Federal Housing Administration

The FHA 203(k) loan is unique in that it combines the advantages of a renovation mortgage with the advantages of an FHA loan product (lower eligibility criteria), making the property and project finance more accessible to lower-income borrowers. Borrowers must meet all normal FHA loan eligibility standards in order to qualify for a 203k rehab loan.

The home must be older than a year.

Work completed must be worth more than $5,000. (There is a Limited 203(k) product available if the repairs aren’t as thorough.)

The total cost of the purchase and rehabilitation cannot exceed the area’s mortgage limits.

The 203(k) rehab loan offers a great deal of flexibility. The 203(k) rehab loan can be used to buy or refinance a home, rehabilitate the residential section of a mixed-use property, convert a single-family property to multi-family, or totally rebuild a structure as long as the original foundation is intact. Isn’t it incredible?

What is a Home Renovation Mortgage?

A home renovation mortgage is a loan for the purpose of renovating, remodeling, or repairing a home. It is frequently a mortgage plus additional funds for home upgrades. It could take the form of:

• A purchase mortgage with a portion of the money set aside for improvements.
• A refinance of your current mortgage that includes a cash payment for home upgrades.
• A line of credit or a home equity loan (HELOC)
• A personal loan that is not secured
• A government loan, such as a Fannie Mae HomeStyle loan or a Federal Housing Administration 203(k) loan

You don’t have to dwell in the home; some home renovation loans can be used to purchase a fixer-upper and make immediate repairs without the need for further financing.

Personal loans normally do not need the borrower to have a particular level of equity in their home, but most home renovation loans must.

Home renovation loan vs. renovation mortgage

The quantity of loans is the key difference between a renovation mortgage and a home renovation loan. Consider the following scenario:

• A renovation loan and the home’s purchase price are combined into a single loan. You start making your monthly payment for both the purchase price and the project after closing.
• A home renovation loan is similar to a car loan or a home equity line of credit in that it is a second loan you take out. Because it’s not included in your mortgage, you’ll have to make two separate payments.

The Pros and Cons of Renovation Mortgages

Pros

• To account for expected upgrades, you can borrow more money than the house was originally valued at.
• In comparison to a standard loan, your interest rates and down payment may be lower.
• It’s possible that your interest is tax deductible.
• You don’t need cash on hand to remodel a home. This means less financial stress and more home possibilities during the purchasing process.

Cons

• Finding a lender who will provide you with a renovation loan can be tough.
• It can be tough to find trustworthy contractors willing to deal with a bank on a renovation loan. This is because they will need to put up cash for goods and labour before the first draw with the lender.
• Before the appraisal, you must have a contractor and renovation plans in place, leaving no space for error.
• Because there are more persons involved, the approval process can take longer than a standard mortgage.
• Because the project has already been set by the bank, adding additional scope of work can be challenging.
• Any additional payments made after the initial lump sum must be made in cash and cannot be added to your lender’s balance.

How Much Can I Borrow with a Renovation Mortgage?

This, too, will be determined by your circumstances. A multiple of your income, or joint incomes, is frequently used to determine how much you can borrow. Many renovation mortgage lenders will also look at your available disposable income after you’ve paid off your debts and change the amount you can borrow based on that.

During the removal of a wall, supports are used to keep it in place.

Renovation mortgages and home improvement loans are just a few of the financing choices available to renovators.

It may be more difficult to satisfy renovation mortgage lenders if you are self-employed. In this scenario, contacting a broker to find a suitable lender might be a good idea.

Find an expert who can match your needs to a lender who can help if you have a bad credit history. The same is true if the property you’re restoring is out of the ordinary. The Ecology Building Society specializes in sponsoring projects that have green elements or are in danger of being demolished.

Is a Deposit Required for Renovation Project Mortgage?

The majority of renovators will use a mortgage that advances the majority, but not all, of the property’s market value. As a result, you’ll need to raise funds for:

• The remaining amount of purchase price
• survey and design expenses.

To get a project off the ground, you’ll normally need 15-20 percent of the total budget in cash. This deposit can be funded in the following ways:

• from savings
• by borrowing 
• from the sale of assets such as your present home

Mortgage Extensions

A lovely contemporary kitchen was created by extending the family home.

Remortgaging is frequently used to fund extensions because it is the most cost-effective solution 

You have three options if you already own the property you want to extend (or renovate):

• To free up cash, increase your mortgage. The cheapest option is usually mortgage funding, but check around for the best offer – switching mortgages can save you money.
• The next cheapest alternative is a home improvement loan secured against your home. It may be less difficult to obtain than a larger mortgage.
• The third option is to take out a simple personal loan.

In Conclusion,

Home renovations are frequently put on hold due to the large sums of money required to finish the repairs. A renovation mortgage allows home purchasers to rehabilitate an outdated and distressed property while incorporating project expenditures into a mortgage’s low-interest rate.

Finally, a home that might otherwise be disregarded is saved; a homeowner is able to purchase a property and immediately raise its value; and a fixer-upper has a chance to compete in a competitive real estate market.

Renovation Mortgage FAQs