WHAT IS A RENOVATION MORTGAGE AND WHY IS IT A GREAT WAY TO FINANCE HOME IMPROVEMENT?
A renovation mortgage is a first mortgage product that allows a borrower to finance the cost to renovate, upgrade or add on to an existing home, based entirely on the future value and condition of a home. These products can be used by OWNER OCCUPANTS, 2nd HOME borrowers and INVESTORS, and can be used to PURCHASE or REFINANCE a home. Mortgages can be as small as the $20,000 range (many lenders have a floor of $50K) or up to $1,500,000 and higher.
WHAT ARE DIFFERENT RENOVATION MORTGAGE LOAN PROGRAMS?
We have the most renovation products of any lender, that I am aware of, and I have been doing these loans since 1991, and have worked for top 5 renovation lenders my entire career. Here at Prime Lending we offer FHA 203K (Standard and Limited, formerly known as Streamline), Fannie HomeStyle, EZ-C (our in house renovation product), and Jumbo Renovation.
HOW CAN I PAY FOR A HOME IMPROVEMENT PROJECT OR ADDITION TO MY HOME?
There are basically 5 ways to pay for such a project, all of which will vary in availability based on your financial resources, your built in equity, and how long you think you will keep the home (or the mortgage).
1. Cash (purchase or refinance) – This is obvious, and if you have enough cash to pay for a project, great. However, it is often a good idea to get input from your financial adviser/CPA/money manager, to see if it might be better to keep your investments intact, and increase your tax deductibility by adding to your mortgage balance and letting your cash investments to continue growing.
2. HELOC/2nd Mortgage (refinance only) – If you have enough built equity to tap into funds and leverage them against your current home, then this can work. It gives you complete control of the money, and the closing costs are fairly low. Note: This is a product that PrimeLending does not currently offer.
3. Renovation Mortgage (purchase or refinance) – The big plus here is this product lends based on future value of the home, not the current. Also these loans usually are not concerned with current condition of the home. Hole in the roof; no heat; massive structural damage; stolen plumbing; and so on…NO PROBLEM. We want to lend you the money to return the home to its original grandeur.
4. Personal Loan from Bank or Vendor (Contractor) (purchase or refinance) – This is rare to find, but does exist. Always look at the terms (rate, months, fees), and note this type of financing is not likely to be tax deductible. Also, these types of loans are often capped at fairly small amounts, and may not be high enough to pay for all of your needed or desired repairs.
5. Credit cards (purchase or refinance) – Not highly recommended unless the amount of repairs is relatively small (under $5 – 10K) and you have the cash flow to pay the card down in a short period of time.
WHAT KIND OF RENOVATIONS AND IMPROVEMENTS CAN BE FINANCED WITH A RENOVATION MORTGAGE?
Almost anything you can think of. Minor improvements that are more cosmetic in nature (paint, tile, trim, lighting, etc…); Major improvements like gutting and renovating a kitchen, bath, master bedroom, family or great room; System upgrades such as heating, plumbing, electrical, etc.; structural and envelope work like roofing, siding, trim, porches, decks, and much more; additions of all shapes and sizes.
WHAT WILL LIMIT ME (IF ANYTHING) ON WHAT I FINANCE INTO MY RENOVATION HOME MORTGAGE?
There are only three things that will stop you from borrowing what you want on a home…
1. What you qualify for, based on your qualifying ratios, credit, income stability and assets.
2. What the property appraises for. It must appraise for roughly the amount of the acquisition costs. EX: Sales price = $200,000 + renovation budget of $100,000. The appraisal will have to come in around the $300,000 mark to make the loan work.
3. Program loan limits. Each loan program available on the renovation mortgage menu has loan limit caps. For example, the single family Conventional limit is currently $424,100, but the FHA limit in Richmond, VA is higher at $535,900. Beyond these limits is the Jumbo Renovation products, which will lend over $1,000,000.
CAN I DO MY OWN WORK TO THE HOUSE AND FINANCE IT INTO A RENOVATION MORTGAGE?
The short answer is “no”. Most all the loan programs require that you use a licensed and insured contractor. However, if there is work that you want to do that will not fail an appraisal or code inspection, you can simply leave that out of the bid and do the work yourself during or after the rest of the renovations are done. If you are a licensed contractor for a living, you may be able to get an exception to be your own GC.
CAN I USE A RENOVATION MORTGAGE TO PURCHASE ANY HOME?
In most cases, if the home is residential in nature, 1 to 4 units, and you qualify, then you probably can. Always check with us first, especially if the home is unique. I have financed a surplus fire house and the buyer has renovated it to their personal residence, and have also financed a dairy barn where the buyer essentially built out a house inside the exterior shell. As long as the renovated property appraises as “marketable” by the appraiser, you can do a lot of things. Very important, the loan will be approved and appraised based on the final number of units. EX: If buying a building that has 5 apartments in it but you will renovate down to 3 apartments (4 or less), then that should work.
CAN I USE A RENOVATION MORTGAGE TO FINANCE A COMMERCIAL PROPERTY?
Yes, but only on a FHA 203K renovation loan, which of course requires you to occupy the building. This little known loophole allows for “mixed-use” properties, as long as the commercial space doesn’t exceed a certain percentage of the overall square footage. A good example of how this can be used is a townhouse type building that is 3 stories; the first floor is commercial; and the 2nd and 3rd floor are residential and include 1 to 4 apartments. Fannie and Freddie do not really allow this kind property. Remember that none of the renovation funds can be used for the commercial space. Typically the tenant will pay for the build out themselves as part of the lease agreement.
ARE ENERGY EFFICIENCY IMPROVEMENTS ALLOWED TO BE INCLUDED IN A RENOVATION LOAN?
Yes! But only the benefits of an EEM can be utilized on a FHA renovation loan (203K).
HOW DOES THE CONTRACTOR GET PAID?
It depends on the type of renovation mortgage you do, but most commonly one of the two following ways:
Standard Draw Process (most loans): Every 30 days, a draw should be made. To initiate the draw, you contact the draw center by phone or email or you can contact your renovation consultant directly. Ultimately someone will be assigned to come to the property and inspect all work that has been completed to date; that person will complete a “draw request”, which all parties should sign; then the inspector will send that draw request to the draw specialist, who will in turn process the draw and send out funds to you or your contractor, depending on how you established that after the loan closed.
Limited Draw Process (Limited or Streamline loans): About a week after closing, you and your contractor will receive a portion of the project upfront. Then once the renovations are 100% complete, and pass inspection, you will get the remaining funds.