How to Get Cash for Your Home Renovation
Renovating your current home can be easier and less costly than you think. You don’t have to rack up your credit card bills or use up your savings. Or even take out a second mortgage or a line of credit (which aren’t bad financing options themselves.)
We want to offer you two other options that you might not have known about: The FHA 203k Construction Loan and the Fannie Mae HomeStyle Renovation Mortgage.
Some buyers may be daunted by the required paperwork and timeline phases of both loans, but they are not as complicated as they first appear. They are well worth any effort since you can have your “dream home” the way you want it – whether you stay put or move up to another home.
What makes these loans a great choice is that you can pay off your renovation costs over the life of the loan, and the interest paid on these loans is tax deductible.
FHA203k Construction Loan
This loan combines the traditional “home improvement” loan with a standard FHA mortgage, allowing you to finance your construction whether you want to refinance current home or buy a home that needs work.
You can select from two different 203k loans – Streamline or Standard. Just like a traditional FHA loan, both versions of the 203k loan have a 3.5% down payment; follow the same eligibility standards; offer the ability to borrow up to local loan size limits (DC area is in the higher-cost area); and are available in fixed-rate or adjustable-rate loans.
Other renovation loan options can require more equity in your home and have more stringent qualification guidelines. You can avoid all that with one of these FHA construction loan options.
- The Streamlined 203k is for less extensive projects with costs limited to $35,000. It requires less paperwork and is a simpler loan to manage. Projects can include minor remodeling without structural repair, window and siding replacement, patio or porch addition, roof repair or replacement, HVAC repair or replacement, interior or exterior painting, and home weatherization. It is also simplified because it does not require a HUD consultant and only has two fund draws. The first 50% of funds is released 30 days post settlement and the remainder of funds is released once a final inspection is completed by the FHA appraiser.
- The Standard 203k is for larger projects exceeding $35,000. It does not have a limit on loan size but requires a $5,000 loan minimum. Projects can include structural changes such as relocation of load-bearing walls, adding new rooms, major landscaping projects, or a “complete gut job” or “tear down.” After your closing, the total funds required for the renovations are held in an escrow account by the bank and are released as the work is completed.
The 203k loan requires several steps as you prepare your application and bids to your lender.
If you plan to buy a new home and not refinance, have your contractors ready to go and already approved by your 203k lender so that you can bid on homes quickly when you see one you like.
Once you make an offer on a home or begin the refinancing process of your current home, you will get a ratified contract allowing 45-60 days until settlement. This gives you time for your contractor to provide your lender with an itemized list of all the work to be done with a cost estimate for each item. If you are using the Standard 203k loan, you will also need to work with a HUD consultant.
Your lender will need these cost estimates in order to approve you for a loan that will allow you to refinance/purchase the home AND pay for the renovations.
Once the loan is approved with the final amount, the contractor has 30 days to begin work with a maximum time frame of 6 months. A HUD consultant will inspect the work as it is completed and will let the bank know to release the funds each time. Any funds left over are used to reduce the principal balance.
Fannie Mae HomeStyle Renovation Mortgage
For this home improvement loan, you also can refinance or purchase a home plus get the necessary funds for a home renovation. The loan amount is based on the appraised “as-completed” value of the home rather than its current value.
You can make a wide variety of repairs or renovations as long as you add value to your home. You can even finance an in-ground pool! And unlike the FHA 203k loan, you can use this mortgage for a second home, not just your primary residence. So investors take note!
The HomeStyle Renovation Mortgage requires you to spend a minimum of $5,000 on your project.The loan amount may not exceed Fannie Mae’s “maximum allowable mortgage amount for a conventional first mortgage,” which is $484,350 on single unit homes or up to $726,525 in high cost areas such as the DMV. This can be used for financing improvements in condos, town homes or single family homes.
The funds from this loan are placed in an interest-bearing escrow account. Funds are released to the contractor after an inspection of each phase of the renovation. Your project must be completed within 12 months.
To qualify for the loan, Fannie Mae requires your maximum debt-to-income ratio to be 43% or less. Also the better your credit score, the better the interest rate you will receive. You can apply for a 15- or 30-year fixed-rate loan and eligible ARM products. Depending on the loan and its loan-to-value ratio, borrowers could put down as little as 3% of the completed value of the home.
Borrowers will need to go through several phases before a lender approves the loan. You will need to select a contractor and HUD consultant to work with you and go over the property to write up a Bid of Repair and Specification of Repair. Projects considered more “cosmetic” and costing less than $28,000 do not need a HUD consultant if approved by lender.
Also, the loan can cover Do-It-Yourself work, but is limited to material costs and contracted labor costs (sorry — no sweat equity!).
Let us know if you have any questions about either of these loan programs. You CAN get the home you’ve always dreamed about and stay in the neighborhood you love!