Financing Your Remodeling
A home may not feel like home until you make it your own. Even the most well-designed homes require updates as they pass from one owner to the next. If you’re buying a diamond in the rough, here’s what you need to know about renovation financing.
Renovation financing provides qualified borrowers with the means to purchase properties in need of improvement at a fixed or adjustable rate. To qualify, borrowers must meet standard credit qualifications, and the property must qualify for the loan program. The total costs must be supported by a bank appraisal. Your lender will also require you to use a licensed insured contractor unless you’re one yourself.
Almost any kind of home improvement can be financed with a renovation loan including a new roof, HVAC, plumbing, electrical, hazard abatement, and cosmetic changes including painting, siding, landscaping, floors and appliances.
The first consideration is the property itself and whether or not its underlying value will support the renovations you want to perform. You’ll need to have all inspections of the home completed, including structural, termite, or septic, if applicable. The inspections should help you determine the scope of the work that needs to be done.
There are several ways to obtain home improvement financing. A cash-out refinance allows you to use the equity you’ve built to refinance your mortgage into a bigger loan. The advantage is more freedom to improve what you want, but you’re starting over with a new mortgage and will have to rebuild your equity. A home equity loan doesn’t replace your original mortgage but adds to your monthly obligations like a second mortgage. You’ll get one lump sum, so use the money wisely. A home equity line of credit (HELOC) is a borrow-as-you-go solution so you only use it when you need it and you have up to 10 years to use it. Personal loans and credit cards are available for projects when you don’t have home equity to borrow against.
If you’re getting a HUD-affiliated loan, such as the FHA 203K home improvement program, your lender will introduce you to a HUD-approved consultant to help you assess your needs. The consultant will go over the inspection reports you have and meet you at the property and itemize the improvements into a “work write-up,” which you can use as your renovation guide when you hire licensed insured contractors. All contractor documentation should be given to your renovation specialist.
Your contractor must provide a detailed estimate and scope of the work to be done, including the materials and costs. That way you, the lender, the contractor, the appraiser, and the HUD consultant all have the same expectations.
The lender will send an appraiser to see if the property will support the cost of the renovations in terms of meeting the value of similar, nearby properties. Once the loan is approved and closed, the funds will be disbursed according to the terms of your contract. All work must start within 30 days of closing and must be completed within six to nine months if renovations are over $50,000.
The workers are paid on a draw schedule. Once all the work is completed, the lender provides you with a letter of completion, which you sign and return for the release of final funds. The lender may require a final inspection by the appraiser to ensure that all the proposed work has been done properly and to provide a completion certificate.
If you are buying an older home, a renovation loan can help you add beauty and functionality to your property that you’ll appreciate for years to come.