I wanted to write about a variety of renovation loan types and properties in this post as an example of what is being done with renovation mortgages. Those reading this post may find inspiration, and if new to renovation financing, may see a way to finance their own renovation project that was unknown to them.
To first give an overview, a renovation mortgage provides funds to not only finance a home remodel or renovation, but also can provide funds to purchase the property at the same time. Or, if already a property owner who has an existing mortgage, who wants to finance the renovation cost, the renovation loan will fully replace any existing mortgage while adding the renovation dollars to it. In this way a renovation loan is a kind of total finance solution, enabling even a first time buyer to buy and renovate all in the same mortgage. Or enabling a property owner to finance updates, remodel, etc., all in one new mortgage by doing the renovation loan as a refinance transaction on an existing property they currently own with the equity already in the property and no down payment needed.
The renovation mortgage is always a first lien mortgage and can be for a 30 year term like most other mortgage types. It is not any sort of add on home improvement loan, personal loan or second mortgage to be clear.
The eligible property types range from condominiums, single family homes, vacation homes, to two, three or four unit apartment buildings.
What makes the renovation loan work very well in most circumstances is the fact of appraising a property to its future, After Renovated Value or ARV in advance of any construction work being done and before a buyer even closes on the purchase of the property. This means that using a written Contractors renovation proposal defining all work to be done and labor and material costs, with a description or new floor plan, an appraiser will appraise the property to the value it will attain when the renovation is done later, after the mortgage is approved and closed. In this way both the lender and the buyer or owner will know in advance if the proposed renovation cost adds enough value to the property for a loan approval and does the deal make sense.
In a purchase situation the sale price of the property is added to the renovation cost for a total transaction cost. The down payment is then calculated off that total transaction cost. For example, a property selling for $200,000 with a $100,000 renovation budget is then a total transaction cost of $300,000.
The required down payment of any of the renovation loan types can vary from as little as zero down payment with the VA Renovation loan for eligible Active Duty Military & Veterans, 3.50% down for FHA 203K, to up to 25% down for Freddie Mac Choice or Fannie Mae Homestyle renovation loans depending on number of units in the property and whether owner occupied or an Investment purchase to rent out. In this example above if the renovation loan type is Freddie Mac Choice and a single family home to be owner occupied, the minimum down payment is 5% of the total transaction cost of $300,000 or $15,000 for an eligible borrower.
Below are recent renovation loan success stories to show examples of how clients are using renovation mortgages to rehab properties immediately when purchasing them or after having owned them for a while.
· 4 Unit renovation as a refinance mortgage– A client has owned a 4 unit property for some time with an existing mortgage of about $300,000. The client wanted to do significant renovation across the 4 apartments. The renovation budget was some $300,000. The new loan to both pay off the current mortgage and fund the renovation was then about $600,000. As it happens the After Renovated Value or ARV was found to be close to $900,000. On a refinance mortgage there is no down payment usually as the owner already has equity or value in the property beyond the current mortgage, if there is one. The type of renovation mortgage used was Freddie Mac Choice.
· 4 Unit renovation done with the purchase– A client looking for a 4 unit building found one that needed a complete interior rebuild in an area that would support an After Renovated Value or ARV equivalent to the needed renovation budget of some $500,000 plus the purchase price. The purchase price was under $300,000 along with some $500,000 for renovation for a total of about $800,000. The After Renovated Value or ARV was found to be in excess of $800,000. The purchase loan was an FHA 203K Renovation mortgage. The client did have to bring in a down payment since it was a purchase situation. The down payment was about 10% of the total of the purchase price plus the renovation budget in this case due to the particular circumstances involved.
· 3 Unit renovation done with the purchase– A client had a 3 unit property under contract to purchase that needed some $300,000 for the renovation but didn’t want to use their own cash to pay for it. The purchase price was about $350,000 plus $300,000 for renovation, totaling $650,000. The client used a Freddie Mac Choice renovation loan with a 25% down payment. The After Renovated Value or ARV was found to be close to $660,000.
· Single family home renovation done with the purchase– Clients were purchasing a late 19th century home needing renovation for some $200,000. They added about $100,000 into the loan for the renovation for a transaction total of $300,000. The After Renovated Value or ARV was found to be close to $500,000. The clients used a Fannie Mae HomeStyle renovation mortgage with a 10% down payment.
· Single family home renovation done with the purchase– Client was under contract to buy a historic suburban home for $350,000. The house needed a gut renovation with a budget of some $250,000. The total transaction was then for $600,000. The After Renovated Value or ARV was found to be $700,000. The client elected to do a 20% down payment to avoid private mortgage insurance. The renovation loan used was Freddie Mac Choice.
· Single family home addition renovation done as a refinance mortgage– Clients had owned a single family home their family had outgrown. They were seeking renovation financing to add a second floor onto the ranch style home to double the square footage. The cost of the renovation was to be some $300,000. The owners had a current mortgage for about $100,000 that was included in the renovation mortgage to be paid off. The total new renovation mortgage was then about $400,000. The After Renovated Value or ARV was found to be near $580,000. The renovation loan used was Freddie Mac Choice.
· Investor Single family home renovation done with the purchase– The client was an Investor purchasing this home to renovate and then rent to tenants after completion or possibly sell it. The purchase cost of the home was $195,000. The renovation included adding about 10 feet of foundation in the back to extend the length of the home and adding a second floor to double square footage. The cost of the renovation was some
$310,000. The After Renovated Value or ARV was found to be $600,000. In this case, as an Investment property, the appraiser also did an After Renovated Rent Value or ARRV and found the house could be rented for $3600.00 a month once completed. As an Investment single family home renovation loan, the minimum down payment was 15% of the purchase price plus the renovation cost or $195,000 + $310,000 = $505,000 so 15% of that was $75,750. The renovation loan used was Freddie Mac Choice.
· Single family home renovation done with the purchase– The client was a Veteran so used the VA Renovation loan to purchase a new home for their family. The purchase price was some $300,000 with a renovation budget of about $50,000. The After Renovated Value or ARV was found to be about $400,000. The VA Renovation loan generally requires no down payment and can be 100% financing depending upon the eligibility of the Veteran or Active Duty Military borrower.
In the above examples of 3 and 4 unit properties, as well as the single family investment property, all the renovation loan types will factor in future rents from the apartments to be leased to tenants at a rate of 75% of the gross future rent as determined by an appraiser. If needed, this future rental income can be used as extra income to qualify along with a borrower’s personal salary income. That is a significant advantage in many cases and allows the borrower to understand up front what income can be expected from rental units in advance, before even closing on the loan.
There are some differences between Freddie Mac Choice renovation and Fannie Mae HomeStyle renovation worth noting. One is that Fannie Mae treats minimum student loan payments differently than Freddie Mac. A Freddie Mac difference is that an owner occupied 3 or 4 unit property can be mortgaged to 80% of its value, as where Fannie Mae allows these to be mortgaged to a max of 75% of value. We select the product that best meets each client’s situation.
When doing these loans as an owner occupier, FHA 203K, Fannie Mae HomeStyle and Freddie Mac Choice renovation will allow up to 6 months of house payments (principal & interest, property tax and home insurance escrow plus any mortgage insurance) to be financed into the renovation loan. This option takes the pressure of making payments for up to 6 months, during rehab time, off the borrower if desired.
Additionally, Investors who wish to buy and remodel homes to lease to tenants can use the Fannie Mae HomeStyle or Freddie Mac Choice renovation loans to do that.
The advantage of a renovation loan done at purchase time is you can have the home rehabbed to your specifications now, enjoy it now, have the extra equity in the property now.
The renovation loans are usually done as 30 year amortizing loans with one closing process and at a fixed rate for all 30 years but can have shorter terms if desired. They can be an efficient way of paying for new kitchens, new baths, new HVAC, new windows, new plumbing, new electric systems, etc., all up front rather than doing the work in pieces over many years.
A renovation loan as above can be used as a refinance mortgage to add onto your home or remodel your home completely by paying for it with a 30 year amortizing mortgage. Doing a remodel in this way makes sense in that you have it done all at once to enjoy now or if you wish can sell the property. None of the renovation loans have any pre-payment penalty or restrictions on selling the property.
I have had clients who have bought and rehabbed a 3 or 4 unit property, refinanced it to take cash out based on the increase in equity or value from the renovation and then used the cash to buy and renovate another property. There are many possibilities available with these loans.
I hope the client renovation loan examples above give everyone ideas on how they can finance their own renovation, either up front at purchase time or later as a refinance. I’m happy to answer questions any time.
Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. All loans subject to credit approval. Rates and fees subject to change. Not all borrowers will qualify.