With so many homes still selling as short sales and foreclosures, renovation loans are becoming increasingly popular with homebuyers. Many family residences are being remodeled for extra family members these days. With the rising costs of renting housing, families decided to live together and save money. There are many situations that could apply: rebounding children, aging parents, or a divorcee with grandchildren—the family home needs expansion or renovation to ensure it can fit everyone comfortably.
Rehab loans like the FHA 203(k) program or the Fannie Mae HomeStyle Renovation Mortgage are the perfect answer for some first-time homebuyers, too. If the borrower qualifies for a 203(k) program, the buyer can borrow based on the expected value of the home after the completion of the home rehabilitation.
I will outline some of the common home renovation loans available to consumers and some of the requirements for each. Interest rates are subject to variation for each itemized loan, so be sure to check with a qualified loan officer first, before proceeding with a home purchase or refinance.
Renewal loans are effective for consumers, banks, and mortgage companies because they provide the resources to remove foreclosures from the market and bring them back. In addition, these loans provide first-time homebuyers, (who have historically been 30-40% of a healthy real estate market), the opportunity to renew before moving in.
FHA 203(k) Rehabilitation Loan
FHA-insured home renovation loans are more popular now than ever, because there is an urgent need for resources for renovation. A streamlined 203(k) loan includes less than $35,000 in renewals. For homebuyers with more than $35,000 in rehab work, a full 203(k) is required.
To qualify for an FHA 203(k) loan, the borrower must agree to hire a real estate consultant to evaluate the construction plan and sign off on each phase. The project must be completed in six months, with five withdrawals (or payments to contractors) allowed. A list of approved property renovations is included with the loan. Many borrowers feel that this loan is too complicated – or that the list of renewals is too limited for their projects. But the interest rate on FHA loans is low enough to make them worthwhile.
If you are interested in an FHA 203(k) loan, find a mortgage broker with experience with this type of rehab loan to complete the transaction. FHA loans are usually available for owner-occupied homes. These loans are government insured and have a higher cost mortgage insurance rate, with a 1.75% down payment and 1.35% monthly payment, compared to other loan products. “With traditional rehab loans, the consumer has the option of paying all of the purchasing principals upfront, monthly, or having their lender pay their own (LPMI),” said Jeff Hurd, mortgage banker with Fidelity Mortgage Bank in Newport News, Virginia.
Fannie Mae Renovation Mortgage
When comparing a Fannie Mae HomeStyle loan to a 203(k) loan, Hurd says the HomeStyle loan product offers greater flexibility in repairs and renovations and in the types of homes purchased. The Fannie Mae HomeStyle Loan offers a broader range of renovation projects and can be used for a second home and investment property as well as a primary residence.”
Other benefits of a Fannie Mae HomeStyle Renovation mortgage include a lower cash down payment than traditional rehab loans (minimum 5%) and a lower cost of mortgage insurance. Monthly mortgage insurance payments are reduced with higher down payments and/or a good credit score above 680. A traditional home model usually offers a PMI pricing advantage over an FHA. With Fannie Mae’s HomeStyle Renovation Mortgage, home purchases and improvements can be combined into a single loan for almost any property—and it doesn’t have to be Fannie Mae-owned. Repairs or renovations must be permanently anchored to the structure and add value to the property. Lenders must be pre-approved to sell this product, so be sure to ask the loan officer if he or she participates in this mortgage program.
Al Rehab Loans – The time is now
Now is the time to buy a home with a rehab loan. There are many homes that may be in distress. Whether the house is bank-owned, it’s foreclosure or short sale, or the homeowner is a swindler who doesn’t want to put money into a property to fix it up – there are homes to choose from. Now homebuyers have a good opportunity to buy a home at a great price and renovate it with financing. These rehab loan products make it easy to buy a home and complete home rehab projects at the same time, before moving on to the date. Chances are excellent that the consumer will be able to purchase a property, make the necessary renovations and walk out of the deal with an ownership interest in the home. “There’s a market of savvy consumers who are willing to buy these homes now,” Hurd says.
The housing market has changed dramatically over the past five to seven years. Since there are still vacant properties available in this real estate market, rehab loans are a way to get those properties that are in need of repair. Homebuyers can now expand their choices of homes to live in because they can remodel them to suit their needs. Real estate investors can buy, rehabilitate, rent or resell the property.
Rehab loans are an excellent incentive for the real estate market and a great way for homebuyers to buy whatever they want without having to worry about liquidating cash investments or taking out tens of thousands of dollars plus mortgage to fund a home renovation.