There are basically two types of renovation loans that may
be of interest to you if you were purchasing a home (or refinancing if you are
an existing homeowner) that needed certain repairs in order to meet your
condition of livability.
Below we will discuss them both so that you have a practical understanding that will further educate you on whether either of those loan types might be appropriate for you and your family.
1) FHA 203k Renovation Loan
2) Fannie Mae Renovation Loan
If you were to find a home in the right area and the home
was not up-to-date and lacked certain features that you desire—an FHA 203(k) loan
(FHA Financing) or a Fannie Mae Renovation Loan (Conventional Financing)—might address your concerns.
An FHA 203(k) loan is basically an FHA loan (3.5% down payment needed) that combines a first mortgage with that of a renovation loan. A Fannie Mae loan does basically the same thing—but it combines a conventional loan—with that of a renovation loan—and is often used on "Fannie Mae" properties that need renovations!
With both loans the projected rehabilitation costs are held in an escrow account and disbursed as work is completed and inspections are done. The final loan amount is based on the projected market value of the property when all repairs are completed—and you would effectively have only "one" loan.
By combining the loans you would in essence have one loan
(making your payments more convenient and affordable—as well as increasing your
interest deduction for tax purposes).
With either loan—you could make the needed repairs or upgrades (within limits) that were needed to make the property—more to your—and your family's liking.
You can utilize a renovation loan (if you qualify) for a home that you anticipate purchasing that needs repairs—or your current home—you would have to refinance your existing loan(s) into a renovation loan.
If you are currently looking at and considering purchasing a
home that you really like—but the home is in disrepair or outdated in a few areas—a renovation loan
may be appropriate.
Always realize that you can’t use it to add a pool, basketball court—and the like.
Keep in mind that a renovation loan must be utilized for
certain repairs such as painting, bathroom remodeling, kitchen remodeling,
adding a deck or additional living areas—and can even include new
appliances, HVAC systems, plumbing, electrical and other areas specifically outlined
You can make changes to improve the functionality of the home—as well as modernize an outdated home.
In addition—the loan can be used to eliminate health hazards and improve safety, improve the appearance of the home, repair or replace a well or septic system, repair or replace roofing, repair or replace gutters and downspouts, repair or replace flooring, tiling and carpeting—as well as making the home more accessible for the disabled.
As you might expect a renovation loan is more complex than a
traditional loan due to the additional paperwork and the requirement that the
repairs are done to a certain standard—and are to be completed in a certain
You would be involved with not only the lender—but also builders and their subcontractors, lender representatives—appraisers and possibly other parties.
In some cases you would not be able to move into the property until after the repairs were completed—which in some cases could be several months after closing.
Key questions you must ask yourself if you are considering a renovation loan include the following:
Know that the primary reason that most
consumers utilize renovation loans is to
bring in a more modern style or add more features to their home!
Also, keep energy use in mind at the time of your purchase—as high
energy bills can offset your low mortgage payment.
Are there old appliances, HVAC, water heaters etcetera on the property? Furnaces often last 20 years and Central Air systems often last 15 years—on average! Does the electrical wiring in the home that you are considering need to be replaced?
Cement patios or brick pavers—properly installed can last in excess of 25 years—and a wood deck if properly maintained can last 15 years or so. A good resource for the life expectancy of home products is the Residential Rehabilitation Guide that you can access at www.huduser.org/publications/pdf/rehabinspect.pdf.
Also keep in mind that if you do decide to obtain either one
of the loan types—be sure you are dealing with a loan officer who has
experience in the process.
By doing so you can make a smoother transition as the more experience a loan officer and lender has—the smoother the process should be for you.
Also, it is important that you know your credit position
upfront prior to obtaining a renovation loan—or any loan.
By doing so--you put yourself and your family in control—which is the way it should be!
If you need to further improve your credit—or educate yourself on your finances in general—be sure to navigate this site in an effective manner.
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About This Article:
The above article was written by Thomas (TJ) Underwood. Thomas (TJ) Underwood is a former fee-only financial planner, a former top producing loan processor and is currently a licensed real estate broker in the state of Georgia.
He is the writer behind The Real Estate & Finance 360 Degrees Series of Books that include The Wealth Increaser, Home Buyer 411 The Smart Guide to Buying Your Home, Home Seller 411 The Smart Guide to Selling Your Home, and Managing & Improving Your Credit & Finances for this MILLENNIUM.
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He is the creator of TheWealthIncreaser.com where he regularly blogs about helping consumers improve their credit, finance and real estate pursuits in an intelligent, consistent and proactive manner.
He’s always looking for ways to make intelligent finance improvement happen for those who “sincerely desire” success in their future. He was the first financial planner to coin the phrase "financially alert mind" and he consistently writes in a style that is designed to provide consumers the ability to take control of their lives and achieve great results.
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