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What Is A Home Renovation Loan

What is a home renovation loan?

When dealing with a property that is in need of modernization or repairs, homeowners will often take out a high-interest home improvement loan. A FHA Streamline 203k loan offers the borrower a fixed or adjustable rate loan with straightforward terms.

The minimum down payment is 3.5% of the purchase price, plus the renovation costs and a 10% contingency on a purchase. For a refinance it could be as little as $0 out of pocket. A renovation loan is a regular fixed rate or adjustable rate mortgage with money built into it for renovations.

What FICO score do I need for a renovation loan?

620 is the minimum Fico credit score required.

What is a FHA Streamline 203K Mortgage?

FHA Streamline 203k Loan will require less paperwork than a FHA Standard 203k loan. You are still able to refinance your home or purchase a new home plus borrow the money you’ll need for renovations.

You can finance up to $35,000 mortgage to repair, improve, or upgrade your new home. The money borrowed for the purchase of your home and repairs when completed will be combined into one monthly mortgage payment.

How does the repair process work?

When obtaining a FHA Streamline Mortgage refinance or home purchase loan, you will obtain a list of recommended repairs along with a bid from a contractor. There will be a 3 month timeframe in which all repairs must be completed for your final appraisal. The purchase price and cost of repairs can exceed the final appraised value of the home when the work is completed. Your mortgage lender will explain this in greater detail BEFORE you borrow any money for repairs or upgrades.

What type of repairs or upgrades can I make?

  • Replace or repair existing HVAC systems
  • Replace or repair roofs, including gutters and downspouts
  • Replace or repair plumbing systems
  • Update floors or flooring treatments
  • Interior and exterior painting
  • Replace existing appliances or install new appliances
  • Waterproof basement
  • Home weatherization
  • Doors and window replacements
  • Handicap accessibility
  • Upgrade existing electrical wiring
  • Replace or repair existing exterior
  • Make energy efficient improvements
  • Install a septic or a well
  • Connect to public sewer
  • Convert from oil to gas heat

What is a FHA 203K Mortgage?

This is very similar to a streamline loan mortgage, but this allows for structural changes to the home.

What types of repairs or upgrades can I make?

Section 203(k) loan covers a wide range of home improvements. These include, but are not limited to the following:

  • Remodeling bathrooms, a kitchen and built in appliances
  • Replacing a roof, gutters and downspouts
  • Adding a family room, bedrooms or bathrooms
  • Replacing floors
  • Completing a basement or attic conversion
  • Adding a second story
  • Expanding or adding a garage or carport
  • Renovating a deteriorating home such as chimney, termite damage or structural problems
  • Upgrading existing heating, air conditioning or electrical wiring
  • Removing health and safety items including lead base paint
  • Renovating for handicap accessibility
  • Installing a new well or septic system
  • Adding a porch, deck or patio
  • Adding or repairing
  • Siding and repainting
  • Install energy efficient doors and windows
  • Repairing an existing swimming pool

What Is A Fannie Mae Homestyle Renovation

A Fannie Mae HomeStyle is a renovation loan that can be used on a new home purchase as well as a refinance. This is very similar to the FHA 203k, but allows for the renovations of luxury items. An FHA 203k does not allow luxury items.

What type of luxury items can I finance?

Luxury items can include a basketball court, swimming pool, sauna, outdoor kitchen.

Can I purchase a second home or Fix & Flip?

Fannie Mae HomeStyle loan can also be used for a second home, unlike an FHA 203k. This also allows investors to purchase a home, renovate and sell with less money out of pocket versus paying cash.

Homestyle Renovation Quick Facts

  • 5% down payment for a purchase
  • Refinance may be as little as zero % down payment
  • Minimum Fico credit score 620
  • May be used for a purchase or refinance
  • May be used for adding luxury items such as a pool, outdoor kitchen, patio and more
  • May be used to purchase a second home
  • May be used for investors

What is a VA Renovation Loan?

A VA Renovation loan is similar to the FHA Streamline 203k loan. You are still able to refinance your home or purchase a new home, plus borrow the money needed for renovations.

The biggest difference is a VA Renovation Loan typically requires no down payment and there is no private mortgage insurance. Once again, you will just make one monthly mortgage payment per month when the work is completed.

When obtaining a VA renovation refinance loan, you will need a list of recommended repairs, along with a bid from your contractor.

There will be a timeframe in which all repairs must be completed for your final appraisal.

Homeowners may finance up to $25,000 into their mortgage to repair, improve, or upgrade their home. There can be no structural items included in the estimate, such as removing walls or adding additions.

Is there a limit to how much I can borrow?

All of the above loans have a maximum loan amount of $726,525. With all of the loans above there will be a 10% contingency added to the cost of the renovations in case of cost overruns with your contractor. It may be used towards other renovations if you haven’t used it during the normal course of the contractors estimate.

If any of the renovation funds are left over, you may have them applied back towards the balance of the loan. In some cases, the loan can be re-amortized, thus reducing your monthly payment.

Example for a purchase using a Conventional Renovation Loan with 5% down:

Purchase Price $700,000 plus the cost of renovations $50,000, plus a 10% contingency of $10,000, for a total cost of $760,000. Minimum down payment of 5% or $38,000, loan amount $722,000, thus being under the maximum loan amount of $726,525.

Can I select my own general contractor?

Contractors will need to understand the following:

  • The purchaser (buyer) is responsible for selecting and hiring contractor of their choice.
  • There cannot be ANY conflict of interest between the purchaser and the contractor for an FHA or VA renovation loan. This includes family relationships or a financial relationship with the contractor.

However, a Fannie Mae Homestyle Loan does allow for family members to be the contractor.

  • HUD and FHA does not approve, endorse or certify remodeling/general contractors or builders.
  • However, the lender is responsible for determining that the selected contractor is acceptable to complete a 203k or conventional renovation project in a timely and professional manner.
  • The contractor must be in accordance with HUD’s guidelines which includes verifying the contractor’s license, proof of insurance, references, credentials, work experience, as well as the contractor’s general understanding of and competency to complete renovations.
  • Contractors must be financially capable of affording the start-up costs and ongoing expenses with any renovation project.
  • Ample credit lines with suppliers and subs and/or sufficient capital/reserves will be verified as part of the certification process.
  • With a conventional renovation loan the lender may provide up to 50% of the material costs upfront.

Have More Questions or Would Like To Start The Process?

Contact Jonathan Joachim, Caliber Home Loan Consultant, NMLS ID: 413808, 25A Vreeland Road, Suite 104, Florham Park, New Jersey 07932. His mobile number is 973-981-3403 or by email jonathan.joachim@caliberhomeloans.com

Jonathan was a major contributor for this blog and is certainly the person who can help guide you through rewarding process.