Home Renovation Loans Help Buyers and Sellers!
Those of us in the real estate industry can look at those types of homes as a problem—or as a tremendous opportunity. We’re on the side of opportunity and believe that we can provide our clients with the information needed to sell these challenging homes.
Scope of Work
Whether a home lacks curb appeal, has nasty interior décor, needs system upgrades or requires major repairs, a renovation loan can provide the stimulus to get those improvements done and the house sold. Not only can this type of financing make the property more aesthetically appealing, it can also alleviate misgivings a buyer might have about major problems.
There is sometimes a misconception that renovation loans are just for major rehabs, but they can also be used to give homes minor touch-ups that are needed to make a property more desirable before the sale—or as part of the sale. Qualified borrowers can use renovation funds for everything from basic paint updates to complex remodeling projects.
The borrower can secure just one loan to cover both the home’s price and the cost of the rehab, rather than needing to apply for two separate loans! Let’s explore three different renovation loan products.
FHA 203k Streamline
Sometimes called an FHA 203k Limited, this option works well for smaller projects. With less paperwork and a simplified process, this financing is designed for health, safety, livability and cosmetic repairs ranging from $5,000 to $35,000.
Borrower requirements include at least a 3.5% down payment and minimum credit score of 640. Gift funds are allowed and a 6% seller contribution may be used. Closing costs, which are typically 2-5%, must be covered at the time of loan closing.
Using a contractor is optional. However, if the borrower does the work themselves, they can only be reimbursed for the cost of materials and not their time. Some of the common uses for 203k Streamline funds are listed below:
Basic non-structural repairs (ex: roof replacement)
Non-structural remodeling (ex: kitchen renovation)
Energy efficiency (ex: window and door replacement)
Accessibility modifications (ex: ramps and interior updates)
Paint or flooring (ex: interior and exterior)
Health and safety projects (ex: lead-based paint stabilization or mold remediation)
FHA 203k Full
This rehab loan—also referred to as a Standard 203k—has a $5,000 loan minimum. There is no numeric maximum, but it must be below the FHA county loan limit. A 6% seller concession is allowed and borrowers are required to make a 5% down payment, which may include eligible gift funds.
While many elements of this financing are similar to the 203k Limited, it also allows structural repairs. Work must be completed by a licensed contractor. A nice feature of the 203k Full is the fact that clients may also be able to include six months of living expenses during renovation. Qualified improvements include:
All Streamline-eligible updates (ex: minor or non-structural)
Major renovations (ex: moving load-bearing walls or adding rooms)
Landscape overhaul (ex: adding a patio or deck)
Water and waste updates (ex: a new well or septic system)
Moving existing house to another site
Termite damage, including major repairs
Projects over $35,000
Offered by Fannie Mae, this renovation loan can be a benefit to homeowners or buyers who need to update a less-than-perfect house. While the two FHA rehab loans mentioned above can only be used for a purchase or term refinance, the FNMA product allows a limited cash-out refi.
In addition to the qualifying renovations included with FHA financing, luxury items may be eligible with a HomeStyle loan. There is a minimum loan amount of $5,000 and it cannot exceed 50% of post-improvement value. In most cases, the work must be carried out by a licensed contractor. Updates must be affixed to the real property and add value. Here are a few samples of eligible improvements:
Repairs, minor to major (ex: interior damage or driveway replacement)
Remodeling, including structural (ex: transforming small rooms into reconfigured living area)
Energy improvements (ex: windows, doors, insulation, HVAC replacement)
Landscaping (ex: planting beds to extensive outdoor design)
Exterior upgrades (ex: adding a swimming pool)
Providing guidance to potential buyers about their rehab options—and sellers who could give their home an update—can improve the quality of the sale, as well as the satisfaction of your buyers.
That’s why we’ve provided this introduction to renovation loans. Our Loan Originators have taken a deep dive into the details of these fantastic financing options and would love to tell you more about them.
And before you know it, your clients will be able to describe their homes as…
This article is brought to you courtesy of
Jon Whittington CMB, President
Compass Home Loans LLC