How to buy a home with a renovation loan

Buying a home with a renovation loan
  A renovation loan can be used for those home buyer’s who find a home they would like to purchase but it needs some work or a lot of work.  Often times, home buyer’s do not have the extra cash after the closing to get the work done.  They usually use most of their savings to come up with the down payment and closing costs.  In this case, a renovation loan may be the answer.
What is a renovation loan?  This is a type of mortgage that will lump together the price of the home and the cost of repairs or improvements into the mortgage amount. This enables a buyer to purchase a home, usually at a lower cost, and add the expenses to the total mortgage amount instead of having to use their own funds after the closing.  The expenses must improve the condition of the home and can include:
  •  Repairs
  •  Updates to kitchen and baths
  •  New appliances
  •  New or refinishing of the floors
  •  Painting of interior and/or exterior
  •  Vinyl siding
  •  New windows
  •  Central air conditioning
  •  New roof
  •  Furnace repair or replacment
  •  Finishing the basement
  •  Repair or replace plumbing
  •  Repair or replace septic or well systems
  •  Build, repair or replace deck, porch or patio
  •  Install, repair or replace electrical system
The cost of these improvements can range anywhere from a few thousand dollars up to, but not limited to, a hundred thousand dollars.  An appraisal would be required that would be based on the completed renovations.  The home must appraise at the higher value.
After finding a home that is in need of some work, the home buyer would apply for a renovation loan with the mortgage broker.  It is important to find out what fees would be involved, as there will be additional fees with this type of loan. The fees may be minimal and will be based on the program that the buyer will qualify for.  The next step would be to have a home inspection done to make sure you will know if any additional renovations/repairs will be necessary.  It is a good idea to bring a contractor to the inspection to get an estimate of all of the expenses.  The estimate will then be submitted to the lender and become part of the loan.
At the closing, the lender will then wire only the cost of the home to the attorney to pay the seller.  After the closing, the lender will disperse the funds as the renovations get under way.  There will be a consultant to oversee the work being done and report to the lender.  Most loans, like a 203K loan, work will need to begin within 30 days of the closing and be completed within 6 months.  Buyer’s must check with their lender to know the exact requirement depending on the program they choose.
A great new program that I heard about today is a VA Renovation loan that is just for veterans.  This program allows a veteran to buy a home and add renovations to the mortgage with ZERO down.  For a limited time only, this VA Renovation loan will waive all bank fees.  This is great news for veterans looking to buy a home soon.  This can also be used for current veterans who own a home and would like to do some updating or repairs.  They can refinance using this VA Renovation loan.
One thing to keep in mind, however, is that the amount a buyer is qualified to purchase a home stays the same. For example, a buyer is pre qualified to purchase a home up to $250,000.  If using a renovation loan, the home must be purchased for $200,000 if it needs $50,000 of work to be done.
This type of loan can open up many more options for home buyer’s.  Give me a call for more information at 203-305-0157 or contact me to see if it is right for you.


Joyce Marshall

Joyce Marshall is a real estate agent with Carey & Guarrera in Shelton, CT who is a specialist in residential home sales in and around the Shelton area.

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