Given that home sales are at a 14 year high and housing starts recently dropped only because there aren’t enough new homes to go around, it seems we have all found a new love for owning our own. What happens when you find the perfect spot, but the home is just a little too “loved” by it’s previous owner, seriously out of date or just wrong or inadequate for your needs? What if you easily see the potential, but coming up with that down payment was hard enough and you are unsure where you would get the big chunk of green it will take to make it work? Or maybe you really don’t want to live through a remodel, but can’t afford to live one place and remodel another because you already have a life and a housing expense and moving back into your folks basement or your friend’s ADU really doesn’t sound fun with three kids and your pets.
There are a couple of solutions out there. They aren’t all golden but they do work and work quite well. I say they aren’t all golden because if you have never built a home, had a construction loan or done a remodel it can be a bumpy ride. If you know to expect them and what they might be, it will be that much easier though. It also helps if you have someone who done them to walk through it with you. Here are some ways to think about accomplishing the goal that are available through financing that will hopefully be helpful.
- Finance it all in at the time of the purchase using an FHA 203(k) loan (there are two types) or a Fannie Mae Homestyle loan (also two types). Both of these allow you to roll in costs for most normal items either at the time you purchase or as part of a refinance.
- Construction One-time-close (OTC) for a major remodel. These are most commonly used as part of a refinance.
- Take out a second mortgage and borrow against any equity you have in the property – usually you will still need to retain at least some percentage of equity in your home. These are best found at your bank or credit union and will generally require pristine credit. This is a great option if you have enough equity to foot the bill.
- Do a non-QM or private money loan. These are loans that don’t fit the normal box. They are more risky and most common among investors who want to fix and flip a home or fix, refinance and hold either for investment or primary residence. Rates and terms aren’t as attractive as traditional credit loans. Rate may be higher, there may be a balloon or a call on the Note due after a short period like 6-36 months. The idea is that it is a temporary loan to get you through the remodel and then you will want to refinance into a more long term loan once the project is complete if you are planning on keeping it.
Here are a few more details on the various programs.
FHA 203(k) Streamline- for improvements and repairs that aren’t considered structural and include all that are considered deficiencies like inadequate electrical panel or nonworking items like a furnace or air conditioner. This is for up to $35k including fees and a contingency fund. In some areas that amount could be up to $50,000.
FHA 203(k) Standard- allows you to finance up to HUD’s county limit for the property and included repairs that might be structural as well as cosmetic and functional. Lists are available for allowable repairs. This does allow you to rehab the property before moving in and have the payments escrowed so that you aren’t making two payments or having to live in a construction zone.
Fannie Mae Homestyle is the conventional version of the FHA Standard. You may borrower up to 95% of the completed value or the cost to purchase plus renovation costs, whichever is less. Repairs and upgrades, including luxury items like outdoor kitchen or an addition can use this program.
Fannie Mae Homestyle Limited allows for smaller projects under $25,000. There is also a separate pool program for installation of a swim pool.
HomeStyle can also be used for single unit and manufactured homes up to 95%, 2 unit primary residences up to 85%, 3-4 unit primary residence up to 75%. For second homes one unit is allowed and manufactured housing is allowed up to 90%. Investment property is also allowed for single unit homes at 85% on a purchase and 75% for a rate and term refinance. Note that these are all expressed as a percentage of the completed value or the total of liens/cost + cost to renovate, whichever is less.
If you’re thinking about that renovation project or you are an industry professional looking to help get things moving on a project where the funding isn’t readily available, I would love to help you or your client talk through the choices, answer questions and hear about the vision. Let’s talk and explore options!
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