What are the benefits of a renovation mortgage in Omaha Nebraska?

A renovation loan is an excellent option for buyers who found a house that is just not quite their dream home. Many buyers find a house that has just about everything they want, but there are just a few projects that would make it perfect. A renovation loan allows those buyers to get funds needed for those updates with the purchase of a home.

What is a renovation loan?
What types of renovation loans are there?
The pros and cons of a renovation loan?
How do you qualify for a renovation loan?

For more information on renovation loans contact us!

What is a renovation loan?

For most loan programs, additional funds cannot be borrowed above the purchase price. The loan cannot cover cost or repairs to the property. However, with a renovation loan funds can be set aside in escrow for repairs and renovations to the property after the purchase is complete. For buyers that love everything about a house except a few details, a renovation loan gives them the funds to make it a dream home. For more distressed properties, a renovation loan can give funds to make an uninhabitable property habitable.

What types of renovation loans are there?

Both FHA and conventional have a renovation program. FHA’s program is called 203k and conventional’s is called “Homestyle”. The FHA 203k loan also has two versions. A streamline and full version.

FHA 203k full renovation

This is the total package. With the 203k full renovation, a buyer could, in theory, tear the house down to the foundation and rebuild it. If the buyer can make the numbers work there is just about no limit to what can be done. You could turn a single family into a duplex or duplex into a single family. You could buy a dilapidated house on a great lot and completely rebuild it. Because the 203k full renovation is more involved there is more involved with the loan process.

A HUD approved inspector will verify the work before and during the project. They will only release money as the work is completed.
All work must be done by a licensed and HUD approved contractor. No DIY on the house.
Loan limit is based on standard FHA loan limits
Money can be “rolled into the loan for 3 months of payments. Just in case you cannot live in the house while work is being done.
203k won’t cover “luxury items” – pools, tennis courts, hot tubs are out.

It is important on a full renovation loan to allow extra time on the purchase contract. While a standard purchase can be done in less than 30 days, a full renovation loan should have at least 45 days from the signing of the contract to the close date. With a contractor and HUD inspector, there are just more cooks in the kitchen and it takes a bit longer to get everything completed.

203k streamline renovation

If you would like to do some minor renovations and want to avoid the hassle of a HUD inspector there is a streamline option. Like it says, this is a more streamline way to get renovation money with the home purchase.

A max of $35,000 in renovation money
No structural renovations
Great for touching up a kitchen or bathroom
Still need to get a bid from a contractor
Half the money will be released at close and the other half when it is done

I have used the streamline option for something as small as new carpet in a home. It is great for someone that just wants to get the house from 90% perfect to 100% the house they want to own.

Homestyle renovation loan

This is Fannie Mae’s renovation loan program. It is excellent for buyers that do not want to pay FHA’s mortgage insurance and qualify for standard conventional financing. Another benefit of the full Homestyle is it does allow “luxury items”. You can put in a pool, tennis court, or hot tub with the money. And who doesn’t love a hot tub!

“Luxury Items” okay with Homestyle
Renovations can be up to 75% of final value – If appraised value is $200,000, renovations can be up to $150,000 of that $200,000
How does not have to be habitable at time of close
Up to six months in mortgage payments can be financed in the loan
Up to 97% loan to value allowed

Disadvantages of a renovation loan

There are a few things a buyer needs to consider before pursuing a renovation loan. Many buyers actually come in thinking they will use the renovation program and we end up figuring out more conventional means of improving the property

Longer close times
All work must be done by a contractor
Higher rates
Higher fees
A more stressful process

Longer close times

Because we have to approve and involve a contractor, the close times on a renovation loan are quite a bit longer than a standard home purchase. While typical home purchases take 30 days or less, a renovation loan can take 45 to 60 days to close. For many sellers (especially in a “seller’s market”) that longer close time is a deal breaker. If a seller has multiple offers on a home they are less likely to take a renovation loan due to the longer close time.

All work must be done by a contractor

This is where many buyers bail out on the renovation loan. Most buyers that dream of fixing up a house imagine they will do a lot of the work themselves. Once they hear that all work (even the minor projects) must be done by a licensed contractor they excitement seems to fade. If you are looking for a fixer upper that you can put your sweat equity into, the renovation loan is not your option.

Higher rates

The rate on a renovation loan can be .25% to .5% higher than standard market rates. This is mainly due to many of the cost associated with underwriting a renovation loan being “rolled into” the rate. If you are looking for the lowest current rate it will not be on a renovation loan.

Higher fees

In addition to the standard loan fees, additional fees will have to be paid to the HUD inspector and appraiser for their services. These will be pre-paid at close and can add several hundred or over a thousand in additional fees to the mortgage cost.

A more stressful process

The fact is even with a great team of professionals, buying a home usually involves a bit of stress. It is a lot of coordination between the lender, seller, inspectors, title closers, movers, etc. With a renovation loan we have to add in HUD inspectors and contractors to that list of professionals. The more people that have to coordinate on a home purchase the more room for error or delay and the more room for added stress.

How do I know if a renovation loan is right for me?

The only way to really know if a renovation loan is the best option is to contact a local mortgage lender. They can review your entire financial picture and see how best to get you in a house and get it remodeled. Sometimes the renovation loan is best but often I am able to find creative ways to finance the renovation project without using the renovation program.

Omaha NE Renovation Loans – 203k and Homestyle