Purchase and Renovate in One Close
Is it possible to include extra funds for renovations in a loan for a new house? Yes, and it's a great idea.
Purchase and renovation loans are an excellent way to buy a home that needs work and turn it into your dream home in a single transaction. Purchase and renovation loans are available in government and conventional programs and provide a more affordable home ownership option and an opportunity to beat the market.
The most common loan product for that today is the FHA 203(k) renovation loan. With 203(k), you can get money not only to purchase the home but also to refurbish it. You can use the funds not only to replace and repair things like carpets, roofs, kitchens, and bathrooms but also to add on. You can repair and rehab an existing swimming pool, but can’t dig a new one. With 203(k), you’ll work with a consultant approved by HUD. That person will guide you through the process of gathering estimates for the work you plan. Expect to pay $500 to $1,500 for his or her services, depending on how extensive the work you plan to do. Once you have your estimates, your loan officer will order the appraisal.
There will be an “as is” value and an “as completed” value. The loan will be based on the second, higher value. The excess funds will go into a separate escrow account and be disbursed to the contractor as needed. If the property won’t be habitable while the work is being done, you’ll also be able to finance up to 6 months’ interest into the loan—assuming the as completed appraisal has a high enough value. Your down payment will be as low 3.5% of the financed value. But check with your lender for specifics. There is also a “streamline” 203(k), which does not require the services of a consultant. Repairs are limited to $35,000. The paperwork is pretty much the same, and the rate is usually the same as for the full 203(k) loan. The most important thing to realize is that, while this is an excellent loan program, it is not by any means a “turnkey” purchase; as the buyer, you’ll have to be quite involved in the process, from start to finish. In my experience, few people are willing to be that involved. Still, if you can find the proverbial diamond in the rough—a trashed-out home in a nice neighborhood—you can build some immediate equity and get a home with a lot of new parts, to your specifications. You want to be sure that both your real estate agent and loan officer are experienced with this loan—there are a LOT of moving parts.
Fannie Mae Homestyle® Renovation Loan
The Fannie Mae Homestyle® renovation loan is a single close loan that enables borrowers to purchase a home that needs repairs, or refinance their existing home and include the necessary funds for renovation in the loan balance. The loan amount is based on the "as-completed" value of the home. There are no required improvements or a minimum dollar amount for the repairs. Repairs or improvements, however, must be permanently affixed to the real property and add value to the property.
Homestyle® buyers succeed in the market just above the flippers market and just below the too much for the "Do it Yourself" market. When you buy or refinance a home, HomeStyle ® Renovation allows you to finance improvements for up to 75% of the property’s as-completed value. (That’s the appraised value of the home once the upgrades are completed). Renovation funds get bundled into your mortgage under one loan, so you only make one monthly payment. If you’re a first-time homebuyer or combining HomeStyle® Renovation with a HomeReady® mortgage, your down payment can be as low as 3%. You can also take advantage of mortgage insurance that can be be canceled in the future and today’s competitive interest rates, which may be lower than a home equity line of credit or personal loan.