Home renovation shows make it look easy. With the right tools, a little know-how, and a lot of imagination, you can completely transform a tired, cramped house full of shadows into a vibrant, functional home that everyone wishes they could call their own. While these shows do showcase the sweat, paint, and sawdust, one area that they often gloss over is the budget. If you’re itching to make changes to your home or eager to take the plunge with a fixer-upper, how do you pay for it? A renovation loan is one possible solution. How does a renovation loan work?
How Does a Renovation Loan Work?
When it comes to construction and renovations, there’s a reason you should always measure twice before you cut. The details matter, and they can have a major impact on the final result and total cost. How does a renovation loan work? The answer to that question depends on which renovation loan you’re planning to use.
VA Home Renovation Loans
A VA home renovation loan lets eligible borrowers use one loan to secure both the purchase price or mortgage payoff and the funds for renovation equal to up to 25 percent of the home’s projected “as completed” value. The renovation monies are held in escrow and released as the homeowner signs off on the finished work. What kind of renovations are allowed? There are limits. For starters, all renovations have to be completed within 90 days, and they must be performed by a VA-approved contractor. No major structural changes are allowed, but homeowners are encouraged to improve, repair, or update the structure and its systems.
FHA 203(k) Loans
With an FHA Limited 203(k) mortgage, the Federal Housing Administration (FHA) gives homebuyers a chance to gather the funds needed for their purchase and up to $35,000 to renovate, repair, or upgrade their home in a single loan. After the purchase price or payoff for the existing loan is passed to the appropriate party, the funds for the renovation are placed in an escrow account. They’ll be doled out from there as the work is completed.
What if the $35,000 isn’t enough to fix your fixer-upper? In that case, you may prefer the FHA 203(k) mortgage. It works in the same way as the FHA Limited 203(k), but it can stretch a bit farther. Repairs must be for at least $5,000, and they can extend to a total reconstruction of the home. Major structural work, cosmetic upgrades, structural repairs, and updates to major features and systems are all acceptable options for someone using this form of financing. How is the value of the home determined? The lender takes the lower of either the property’s current value plus the cost of the renovations or 110 percent of the appraised value after rehabilitation.
Fannie Mae HomeStyle Loans
If you opt for a Fannie Mae HomeStyle loan, you can fund your home’s purchase and finance renovations worth up to 75 percent of the home’s projected value after those renovations are completed. Plus, you can do it in a single loan with one closing and one monthly payment. Virtually any repair that is permanently affixed to the property and adds value is allowed, including extensive improvements or additions that add extra living space to the home. Any improvements that you make can help you build equity, and once you gain sufficient equity you can take advantage of this loan’s cancellable mortgage insurance. As an added bonus, you may be able to secure this loan with a down payment as low as 3 percent.
EZ “C”onventional Loans
An EZ “C”onventional loan is an option for a borrower who craves a conventional approach to renovation financing. Designed to handle smaller repairs, it’s capped at $35,000 and gives a window of 60 days for the completion of the repairs. Once again, the renovation funds are placed in escrow and paid out as appropriate. The costs are rolled into your mortgage so that you only have one loan and one monthly payment. What types of renovations are allowed? They must add value and be non-structural. They may be either a requirement set by the appraiser or a request of the buyer.
Which type of renovation loan is right for your needs? To explore the possibilities, talk to the loan experts at PrimeLending Dallas today.