Renovation home loans: Fairway aims to cut through the noise, myths and misconceptions surrounding renovation mortgage loans. Here are eight common renovation home loan myths debunked.
So you’ve found a home that checks almost all of your boxes. Great location. It’s in your price range. Nice yard. Great bones, as they say. But there’s one thing, or just a couple parts of the home, that aren’t quite perfect, and you’re just about to cross that address off your search list. Maybe the bathrooms haven’t been updated to your liking. Maybe it’s the kitchen. Maybe you thought the place was perfect until your inspector uncovered some potential issues with the roof. Before you automatically disqualify that home from your search, you should consider a renovation home loan!
What Is a Renovation Loan?
Renovation loans allow you to roll the cost of eligible repairs and improvement projects into your home loan, which can save you both time and money. When you use one of Fairway’s renovation loan options to buy your home, Fairway combines the dollar value of the purchase contract with the dollar amount of the necessary repairs and improvements to calculate the adjusted sales price. If the house is uninhabited while being renovated, you can finance up to six months of your monthly mortgage payments into the loan amount as well to alleviate the need to make two housing payments at once.
Eligible repairs and upgrades may vary from loan program to loan program, so be sure to ask your renovation-certified Fairway mortgage advisor about all your options when discussing specific details of your project. As you begin to learn more about the varying renovation loan programs available, it’s natural for there to be a certain amount of confusion about the process — not to mention all the misinformation and outdated information floating around out there. We’re here to demystify the process — to separate the myths from the facts.
Myth #1: There Are Limited Options in the Renovation Loan Space.
In today’s market, that’s just not true! With Fairway, there are more “cans” than “cannots” when talking about renovation financing. First, there are Conventional loan programs backed by both Fannie Mae and Freddie Mac. The FHA offers two different renovation loan options depending on the scope of repairs. In addition, there are VA renovation loan options for those who qualify, as well as USDA renovation loan options if you are looking to purchase in certain rural or suburban areas. Eligibility varies from program to program, as noted above. Some of these options even allow for the addition of a pool, another room to increase square footage, the replacement of all mechanicals or flooring upgrades. You have plenty of options available. Take advantage of them by finding a loan officer in your area now.
Myth #2: My Down Payment or Closing Costs Are Increased with a Renovation Loan.
In addition to the sales price of the home, renovation loans use the value of the home after improvements to finance what are called hard and soft home improvement costs into the total loan amount. Hard costs include bid, contingency reserve and any escrowed mortgage payments you elect to finance into the loan amount. Soft costs are more intangible, and they are typically associated with planning, permitting, and the cost of borrowing money. Renovation soft costs are not lumped into closing costs, and the closing costs associated with a renovation loan are not necessarily higher than with any other home loan.
Take it from Fairway’s resident authority on renovation financing, our Renovation Development Manager, Adam Levitt: “Let’s say your budget is around $300,000. You find a property listed at $250,000 but it needs a little more life breathed into it, whether you want to add an additional room or make significant repairs. If the project is about $50,000, for the sake of the scenario, you’re still right in your budget. Paying for the project is rolled into the mortgage loan amount, so you never even have to think about those two costs as separate costs. It’s one loan — one monthly payment.”
Myth #3: It Will Take Too Long.
Delays usually only happen when costs and projects change mid-transaction. Your certified Fairway mortgage advisor will work with you to set proper expectations and communicate with you clearly to ensure deadlines are met along the way. After all, communication both ways is the key to closing any home loan on time, and that’s something we pride ourselves on at Fairway. Qualified borrowers with eligible contractors and a clear renovation plan at the time of offer generally close within 45 days of loan application.
“Your home loan is going to close with your home in as-is condition. The seller will be out of the picture, and then the project starts,” Levitt added. “Renovation loans don’t need to take any longer than other home loans, especially when your certified mortgage advisor is providing the proper education and awareness along the way. As one of the biggest renovation lenders in the space, we’re well practiced on helping our clients’ loans stay on schedule.”
Myth #4: You Have To Be a Renovation Expert.
Fairway’s certified mortgage advisors provide the type of guidance and expertise that we have become known for in the renovation space so that you have peace of mind throughout the process. No prior renovation or contracting knowledge is necessary on your part because the contractors must maintain proper licensing and insurance to be eligible for Fairway’s approval to start the project. Be sure to ask your certified mortgage advisor and confirm these details before the project starts.
Myth #5: Renovation Loans Are for Primary Residences Only.
The 203(k) renovation loan programs offered by the FHA follow FHA guidelines and do require that homeowners occupy or escrow occupancy mortgage payments within 60 days of loan closing. These FHA renovation options are popular options, so perhaps when people hear this requirement, they may improperly generalize that it must be the case for all renovation home loan programs. However, Conventional renovation loan programs provide options for investment properties as well.
Myth #6: Renovation Loans Are for Purchase Loans Only.
That’s just not true. Fairway has options for renovation home loan refinances as well! If you would rather upgrade your current home than spend the time and energy it takes to shop for a home, pack, uproot your family and move, ask your certified mortgage advisor about refinancing into a renovation loan! Just like with purchase loans, there are Conventional, FHA, VA and USDA options available to those who qualify. Remember, the longer you have lived in your home, the more equity you likely have. The more equity you have, whether due to a solid payment history, home value appreciation or both, the more you will be able to borrow in the form of a renovation loan.
Myth #7: Limited 203(k) Loans Are the Best.
Sometimes, for some clients, they are! But this myth speaks to a more general error in mindset going into the process than being able to objectively rank the loan options from “best” to “worst.” When you hear the term “Limited K,” the reference is to the Limited 203(k) renovation loan program offered by the FHA. FHA renovation loans come in two forms: the Limited 203(k) and the Standard 203(k). The Limited 203(k) loan program has many benefits, including the possibility of up to 50% of the renovation funds being available just a few days after loan closing.
However, there may be loan programs that are a better fit for some clients, especially for first-time homebuyers. The Limited 203(k) also limits the cost and scope of the project more tightly than some other renovation loan options. The Standard 203(k) loan is less restrictive on project cost and scope and allows homeowners to finance the cost of a HUD consultant, who outlines the project in the agency-required format and delivers a fair representation of scope and cost. But again, these are just two of the options your certified Fairway mortgage advisor has in their tool belt. If there is another option that better fits your current financial situation and goals, we have flexibility!
Myth #8: Higher Interest Rates and Lower Housing Inventory Mean I Should Wait.
Let’s take a deeper look into this. If you were to borrow money for a home improvement loan through your bank or another type of lender, the interest rate associated with those loans would usually be significantly higher than the interest rates associated with a home loan, even in a higher rate atmosphere. This is a key reason why owning a home is so advantageous, regardless of whether it is currently a buyer’s market or a seller’s market. A home loan, whether it is a purchase loan or a refinance loan, whether you are folding the costs of renovation into it or not, historically carries one of the most affordable interest rates you’ll find. That’s ultimately what makes renovation loans such a powerful tool. However, rates aren’t the only market factor one should be paying attention to when deciding whether a renovation loan is right for you.
“When there isn’t a whole lot of inventory in the housing market, when what you’re seeing on the market might need a little life breathed into it, that’s another time when a renovation loan becomes really powerful,” Levitt said. “Why would you want to miss out on a property that checks all the boxes like location, being close to work, that your family loves, just because you heard something negative about using a renovation loan from someone who may not have been properly informed? The myths and misconceptions are out there, but when you go with a leader in the industry like Fairway, we’re there for our clients the whole way, from application through loan closing and through the project’s completion, to guide you on your way to homeownership and home improvement.”
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