A big challenge for buyers in today’s tight market is finding a home in the right neighborhood which is in acceptable condition and the size they want. A great solution is buying a home in need of updating or repairs and making it perfect.
Renovation financing will give you the money to buy the home and pay for those updates or repairs in one 30-year fixed mortgage.
Most buyers do not have the cash for a large down payment and the funds to renovate a home that is in need of repairs or is too small. The Federal Housing Administration offers financing through its 203k program with a maximum loan of $379,500 and 3.5 percent down, and the Federal National Mortgage Association provides loans through its Homestyle program of up to $417,000 with a minimum of 5 percent down. Both options have 30-year fixed rates and involve only one first mortgage.
Here’s an example of how a renovation mortgage works: A buyer wants to buy a home with a price of $300,000 and expand the kitchen, add a master bedroom, remodel the bathrooms and add an attached two-car garage at a cost of $100,000. The appraiser values the home for $400,000 subject to the completion of the improvements. The financing is set up as if the purchase price is $400,000. The buyer puts 5 percent of $400,000 down. At closing, the seller gets the $300,000 purchase price and the lender sets up an account on behalf of the buyer for the renovations/repairs for $100,000. As the work is completed, the lender pays the various contractors.
The buyer has a 30-year fixed first mortgage, the perfect home and has invested only $20,000.
Basically, almost any repair or update to improve the home or attached garage is allowable. Examples of improvements that are not allowable are swimming pools, exterior hot tubs, barbeque pits, outdoor fireplaces, tennis courts or gazebos.
The programs are available for refinancing an existing loan. This is a real benefit for homeowners who do not have a large equity position because most banks require that they have 25 percent equity in the after-improved value of the home, which prevents them from borrowing funds to improve their home. Additionally, the renovation loan programs eliminate the need to obtain a short-term construction loan.
Processing a renovation loan is far more complex than a regular mortgage. It’s important to find a lender who offers and specializes in this type of financing. Otherwise, you could experience delays and unnecessary hassles associated with obtaining this type of financing.
Steve Setka is an exclusive buyer’s agent with Keller Williams Realty in Durango and a licensed mortgage originator. He can be reached at 903-7782 or steve@durangore.net.
