Not everyone’s idea of a dream home is the same. Some buyers look for a home that they can buy, move into, and not have to put a lot of extra effort into. Others may find their dream home is in need of some tender loving care. Or, maybe they really want to live in a certain area, but they cannot afford the newer homes available there. Purchasing a fixer-upper might be the right choice. But how do you go about qualifying for a mortgage, making a down payment, and finding the money for those renovations? Many believe their only option is to wait to build equity in the home and then take out a home equity loan. Or perhaps you think you might take more time to save and then refinance your home. While those are viable options, there are home renovation loans available to buyers that can help turn your dream of owning a fixer-upper into a reality.
There are two types of home renovation loans to consider. The first is the Fannie Mae HomeStyle Renovation Mortgage, and the second type if the Federal Housing Administration’s 203(k) Mortgage.
The Fannie Mae HomeStyle Renovation Mortgage is a fairly well known loan for home improvements. It allows the borrower to purchase a house in need of repair, or refinance their already existing home to cover renovations.
The money may be used for any number of projects, including repairs, renovations, remodeling or energy efficiency improvements.
While this mortgage is available through any Fannie Mae-approved lender, there are specific requirements that must be met.
- A down payment of at least 5% must be made for a single-family home.
- You must have a credit score of at least 620.
- Copies of all renovation plans and your renovation contract must be provided to your lender, and the lender will oversee all work.
- All work must be completed within 12 months of your closing date.
Investors are also eligible to qualify for the HomeStyle Renovation Mortgage, however they are required to put 15% down versus the 5% required for residual purchases.
While the total amount of money approved for renovations can be up to 50% of the amount the property is anticipated to appraise for after the renovations are complete, the money that is earmarked for the renovations (versus the cost of the home itself) is put into a separate escrow account and paid to the contractor directly.
The Federal Housing Authority offers two types of FHA 203(k) loans. These loans are the Limited FHA 203(k) (previously known as Streamline) and the Standard FHA 203(k) (previously known as Full or Regular).
These FHA loans are ideal for borrowers who have limited funds for a down payment and/or slightly lower credit scores. Though lender requirements may vary, you can have a credit score as low as 500 if you are able to put down 10%, or put the bare minimum down if your score is at least 580.
The Standard 203(k) loan allows for almost any type of renovation project on your home, whether it’s a remodeling project or demolition of the original structure. With this loan, the homeowner must hire a 203(k) consultant to oversee the project from start to finish. If you are unable to live in your home while the renovations are taking place, you will be able to hold off on six months of mortgage payments during the renovation process. Speak to your lender for details.
Some guidelines for the Standard 203(k) are:
- The home must be at least one year old.
- Repair costs must be at least $5000.
- Foundations must remain in place, however repairs to the foundation may be made.
- Swimming pool installations are not allowed, however repairs or removal of existing in-ground pools are covered.
- Repair of septic systems
The Limited 203(k) loan is available for less extensive renovation projects. With this loan:
- You are eligible to borrow the cost of the home plus up to $35,000 for repairs and renovations.
- There is not a minimum amount required to borrow for repairs.
- This loan is perfect for those needing to repair or replace:
Roofs and or gutters
Heating and Cooling systems
Hardwood flooring and/or carpets
You may also use the money to remodel kitchens and bathrooms, knock down walls or add insulation.
As long as the renovation does not include structural modification, the Limited 203(k) is an option worth considering.
If considering a home renovation mortgage, make sure to work with a lender who is well versed in this style of mortgage and let them assist you through the process. These mortgages are much more complex than the standard residential fixed-rate mortgage and an experienced lender will be able to assist you with knowing who to hire for contractors and getting your project paid for.