One type of renovation finance situation I have not posted about involves condominium renovations. As it happens there are many old and outdated condominiums available in most markets. I wanted to write about how the purchase and renovation of a condominium can be done all in one mortgage, just like other types of residential property renovations. The two loans that most commonly would be used are Fannie Mae HomeStyle or Freddie Mac Choice Renovation.
- Both HomeStyle and Choice Renovation will permit an owner occupant buyer to purchase a condominium in an eligible condominium building or project with as little as 5% down payment. The down payment is calculated off the total of purchase price + renovation dollars needed. An example might be a purchase for an owner occupant at $270,000 with a renovation cost added for $70,000 is a total of $340,000. A minimum 5% down payment off $340,000 would be $17,000. The mortgage then is $323,000 which includes the needed renovation funds.
- HomeStyle and Choice renovation will also allow an Investor who is not planning to occupy the condominium themselves to buy with a minimum 15% down payment, which is calculated off the total of purchase price plus renovation dollars needed. An investor may then use the future expected monthly rental income, as determined by an Appraiser, at 75% of gross, as qualifying income for the loan size needed. An investor example might be buying a condo for $200,000 and adding $50,000 to renovate or update the interior. That $250,000 total is how the 15% down payment is computed or $37,500 minimum down payment for an investor who will lease the condo to tenants at completion. The outstanding mortgage then funds the purchase and the rehab with a balance of $212,500.
I recently had a client buy a high rise condominium in Chicago that was old and outdated. The buyer added funds for items like new windows, HVAC, flooring, a renovated kitchen and baths.
The key to any renovation loan approval is always After Renovated Value or ARV. In a renovation mortgage the Appraiser is given the renovation details in terms of costs and what is to be done during renovation. An Appraiser will then find recent sold comparable properties in a similar updated condition, to use for the ARV of the subject property to be renovated.
Below are the particulars of both Fannie Mae HomeStyle and Freddie Mac Choice Renovation mortgages
- These renovation mortgages are made direct to individual borrowers or investor groups but not to LLC’s or other corporate entities.
- Both Home Style and Choice Renovation are first lien mortgage products with amortizing terms of 15 or 30 years. This means they are not any type of home improvement loan or unsecured personal loan or second mortgage.
- A refinance renovation is possible with each mortgage type as well as doing these during purchase time. A client recently used Choice Renovation to pay off his current mortgage and replace it with a Choice renovation mortgage that paid off the $100,000 current mortgage and replaced it with one for $400,000 to fund a $300,000 renovation of his current home. The Choice renovation loan was done as a 30 year amortizing mortgage.
- Using ARV or After Renovated Value allows a homeowner to have the benefit of that value for a loan approval rather than the value of the condominium or other property as it is currently. In the above example with a buyer purchasing a condo for $270,000 and adding $70,000 more for renovation, the transaction total is $340,000. With 5% down the mortgage would be $323,000. We would expect ARV to be at least $340,000. Meaning the borrower is mortgaged to 95% of the value, which is the most an owner occupant can be mortgaged under these loans for a condo.
- The dollar amount of the renovation portion of the mortgage has a limit of 75% of the ARV for both Homestyle and Choice. In the above example with ARV at $340,000 the max size of the renovation budget is then 75% of that or $255,000. I have rarely seen a rehab budget exceed 75% of ARV.
- Each loan will add a 10% to 20% Contingency Reserve (or emergency fund) to the rehab budget to allow for unexpected costs that may arise during rehab, but if never used, it can be subtracted from the principal loan size at completion or used for extra items not originally planned.
- If needed, an amount up to 6 months of payments of principal, interest, taxes, monthly condo assessment and insurance can be added, so that during the rehab period, when the property cannot be occupied , monthly payments are made from the loan rehab funds to avoid the burden of double housing costs for borrowers paying to live elsewhere during rehab.
- Loan funds can pay for costs of Architect plans, Building Permits, Draw inspections, etc.
- A condominium renovation will be limited to the interior of the unit from the walls in basically. The renovation cannot include rehab for any common areas or exterior elements.
- All renovations must be completed within 180 days per HomeStyle and Choice regulations.
- A significant difference over Fannie Mae HomeStyle is that Freddie Mac CHOICE Renovation will allow a 1 unit Investment property refinance rehab mortgage to be up to 85% of the After Renovated Value or ARV. But HomeStyle is limited to 75% of ARV on an investor refinance rehab mortgage whether a condo or a single family house.
I hope this post has been helpful and encouraging to those that may have thought a condominium 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!
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.