You might be like many homebuyers today in this high-priced market. Your budget is likely to be stretched just to get the property. You don’t have to do renovations, but there are loan options that allow you to increase your initial mortgage to cover these costs.
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Each type of loan is different and each has its own advantages, drawbacks and limitations. This is how you can choose the right option for your situation.
How to estimate the cost of remodeling or repairs
Before you talk to lenders about renovator loans, it is important to estimate the cost of your remodel.
This can be difficult, especially in this renovation boom. It is difficult to find contractors, and shortages only increase costs.
Tabitha Mazzara is the director of operations at MBANC. This mortgage lending company is based in California.
Working with an inspector certified by the Department of Housing and Urban Development (known as HUD) is one way to get an estimate of your renovation costs. These HUD-certified inspectors can give you a complete rundown of the work required and the cost.
Add the cost to your mortgage loan
After you have established a budget, you can begin to look at your options for adding this cost to your mortgage. This would mean that the remodeling costs would be added to your original loan amount (the money required to buy the house), creating a new total balance for your mortgage.
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The loan could be used to pay for both your home purchase and your renovations. You would only have one monthly payment. Renovation money isn’t just a lump sum you can use however. There are different loan types that have different restrictions regarding how and when you may use the renovation cash.
FHA 203(k), Loan
FHA 203(k), a government-backed loan, has a few additional rules and requirements than a traditional mortgage. However, it also offers some unique benefits.
A buyer can take out a 203(k), which allows the majority of the loan to be used for the purchase of the home. The remainder is kept in an escrow account, which releases funds as the renovations are completed.
This is a great option for homes that need a lot of work before they can be moved in. It is also ideal for first-time buyers. You can use the renovation money for any number of projects from roofing and plumbing to energy efficiency to structural improvement. Limited 203(k), loans are for projects less than $35,000, and standard 203(k), loans are for projects greater than $35,000 The total amount of the loan must not exceed the FHA mortgage limits set by the government in your locality.
Fannie Mae Homestyle Loan
Fannie Mae Homestyle loans are another government-backed loan option. Although the basic structure is the same as 203(k), the requirements for the loan are slightly different.
Mazzara states that a Homestyle loan would be more flexible than 203(k) because it allows for more improvements.
A Homestyle loan is available to purchase investment or vacation properties. A 203(k), however, is only intended for primary residences. Homestyle loans are also available for upgrades such as pools and hot tubs that aren’t eligible for a 203(k). Freddie Mac Renovation Mortgage (CHOICERenovation Loan and CHOICEReno eXPress).
A Freddie Mac Renovation Mortgage is very similar to a Fannie Mae Homestyle Loan. Freddie Mac is also a government-backed company and offers two types of loan: CHOICERenovation loan or CHOICEReno eXPress.
The CHOICERenovation loan, which is relatively new, offers more flexibility than an FHA 203 (k) loan, and may have lower interest rates depending on your financial situation. A CHOICERenovation loan cannot exceed 75% of the property’s purchase price plus the estimated total renovation cost or the property’s completed value. Refinance transactions are subject to a 75% limit. Renovations must be completed within 365 calendar days from the note date. This applies regardless of whether you’re purchasing a new home or refinancing.
What Does a Remodel Do to Your Home?
These renovation loan options assume that home remodels almost always increase in value.
It can be difficult to predict how much a renovation will increase your home’s value. However, there are some types of renovations which provide greater value than others.
Kitchens and bathrooms are the most popular areas for homebuyers to remodel. These types of renovations are worth the effort, especially now that appliances and materials are scarce.
There are other financing options available for remodeling or repairs
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You might consider adding costs to your first mortgage if you are determined to tackle your home renovation. There are other financing options available for your project.
- Cash-out Refinance
- A cash-out refinance sounds exactly like it does: Refinance your existing mortgage to one.
- You can extract equity through cash if you have a higher loan amount.
This can be a cost-effective way to access funds, provided you are able to secure a high interest rate. This is a good option if you require a large sum of cash to kickstart your renovations. Cash-out refinances are generally not restricted in what they can be used for. This is a great option if you don’t want the hassle of getting a government-backed loan for home renovations.
Home Equity Lending
You can also apply for a second mortgage, also known as home equity lending, if you don’t want your primary mortgage to be affected.
There are two types home equity loans: A home equity loan is a lump-sum loan that you take out upfront, and then pay it back over a fixed term like an installment loan. Home equity credit works more like a credit card. You can draw as much or as little from the line of credit as you want (up to your credit limit), and only pay interest for the amount that you use.
A personal loan is another option to help you finance home renovations if your home equity is not sufficient.
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Although personal loans are based on your credit history, they are not usually secured by any kind of property (such as a home). This means that the interest rates are often significantly higher. However, personal loans can be an option for those who are completing minor renovations of less than $10,000. There are very few strings attached.