Renovation Loans

Find 100 homeowners and ask them how they'd pay for renovation or repair work on their homes, and you'll likely get one of two answers: they'd use their own cash (checking, savings, or retirement account) or credit, or they'd take out a second mortgage (home equity line of credit [HELOC] or regular, fixed second mortgage). The interest rate on a HELOC is adjustable, so as interest rates rise so, too, will the monthly payment. The interest rate on a regular, fixed second mortgage is usually higher than the rate on a first mortgage.

There is a third option very few people are aware of: the Renovation Loan. Renovation loans come in two varieties: conventional (Fannie Mae's HomeStyle) and FHA's (203[k]). While there are some differences between the conventional and FHA renovation loan programs, they both provide homebuyers and homeowners the same underlying benefits1:

  • Purchase money and refinance transactions
  • On a purchase, the costs associated with acquiring AND RENOVATING the property are done with one, regular first-trust mortgage. No HELOC or second mortgage, so the money is borrowed as a regular, first-trust mortgage.
  • HomeStyle renovation loans can be used for owner-occupied, second home, AND one-unit non-owner-occupied (investment) properties.
  • In many cases, Loan-to-Value (LTV) ratios can be based on the after-improved value of the property, allowing for higher loan amounts (subject to program limits)
  • The conventional HomeStyle program allows for other "luxury items" such as pools/spas, tennis courts, outdoor kitchens, landscaping, and even hardscaping. Generally-speaking, if it adds sufficient value and is permanently attached to the home or land, it's allowed..

1 As with any loan program, there are substantial differences between the HomeStyle and FHA 203(k) programs, each with conditions and limitations. To find out if your situation qualifies for a renovation loan, or for help determining whether or not a renovation loan is right for you, consult an experienced mortgage professional. Give us a call today!

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