In working with clients who wish to purchase a home or multi-unit property I am always asked how much will it cost ? Or how does renovation financing work ? Or even how can I afford to buy a less than perfect property and still have money to repair it when I’m spending all my savings on down payment ?
My job is not only to provide answers but to show the way forward. I specialize in renovation financing as part of being a Loan Officer. I spend time helping clients learn how to buy a home and make it their own. The way to do that is to buy and finance the rehab at the same time, with one mortgage. All based on what the value of the property is to become, not what it may be currently. I help clients put all the pieces together to plan and finance a rehab at the same time as purchasing a property.
For example in planning to purchase a single family home built many years ago clients recently asked what the cost might be to remodel the kitchen with all new cabinets, hardwood floors, quartz counter top and new lighting. In addition the house needs all new windows, new flooring, new doors and 2 bathrooms must be updated. Plus the clients want a master bathroom added by using some space from the master bedroom.
What I had done when I first spoke to the clients was to evaluate their financial situation and determine what size loan could be approved for them. Armed with that number they shopped for a home and presented their wish list to me as above for their chosen house. The rehab or renovation loans I work with are called HomeStyle by Fannie Mae and FHA 203K. Each works in a similar fashion. Put simply each mortgage allows the extra funds for rehab, beyond what is mortgaged for the purchase price minus down payment, to be added into the loan. It is really that simple, one loan big enough to include the money to rehab at the same time as the property is purchased.
The rehab funds can be used to do all the work in the above wish list. I always advise clients to use this money wisely for updates that usually add value to a house. Examples of updates that usually add value are kitchen and bath updates, additional baths, additional bedrooms, new flooring, new wiring, or adding a garage. The reason to be sure to use the money on updates that may add value is the rehab loans are approved based on what the value will be with all rehab work done. This works to insure the rehab funds are used wisely. I pass along the details of the rehab with costs for labor and materials to the Appraiser who will then establish the value of the house with all the rehab work included. We call this “as finished” value. That is the best part of how HomeStyle and 203k work in my opinion.
Here is a quick example: Buyers purchase a house for $250,000. The above wish list is then priced out by their chosen contractor to cost $120,000. As a requirement of both these rehab loans we add at least an extra 10% of the rehab cost into the loan for extra or unexpected rehab work that may arise during renovation. Doing so protects both the lender and the home buyer from not having enough funds to fully complete the rehab. In this case that is $12,000 more. The final rehab budget is then $132,000. Adding that to the $250,000 purchase price equals $382,000. The buyers are putting 10% down or $38,200. The total mortgage will be $343,800. In the end the buyers get their dream home once the work is completed. They enjoy it today rather than saving for years before doing the work and they enjoy the “as finished” value now which may well have added more value to the house than the rehab budget itself.
What I do is help buyers understand how this process can work for them and put them together with Realtors who understand this process and General Contractors who can execute the renovation. I’m an advocate for buying real estate using HomeStyle or 203K because most homes need some updates and the right updates as above usually add value to a home.
I can help anyone who may not ever have considered a purchase of a home and rehab project understand how it all works. I have access to a group of experienced contractors and an FHA construction consultant to put all the pieces together for a successful rehab project.
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!