In speaking recently with home owners seeking financing to do a larger scale renovation on their homes or in preparation for a new home purchase I have been asked about larger renovation mortgages than what may be available with Fannie Mae, Freddie Mac or FHA 203K current loan limits.
There is an option I wanted to write about today that may be helpful for a larger cost purchase and renovation of a single family home, townhouse or warrant-able condominium, owner occupied only. The Jumbo renovation loan is a first lien mortgage product. Meaning that it is not any sort of home improvement loan, second mortgage or Home Equity Line of Credit. If done as a refinance, the Jumbo renovation loan will be large enough to pay off the current mortgage and add in needed renovation dollars.
The total size of the Jumbo renovation loan can be up to $2,000,000 and is tied to the value of the property after renovation. Below are the parameters and highlights of how this Jumbo renovation loan can work. If your situation will fit into these parameters, then perhaps a Jumbo renovation loan will be a solution.
- Max loan size for the rehab dollar portion is lesser of $250,000 or capped at 30% of the After Renovated Value
- A home mortgaged to 75% of value is eligible for a Jumbo renovation loan of up to $2,000,000 at middle credit score of 720
- A home mortgaged to 80% of value is eligible for a Jumbo renovation loan of up to $1,500,000 at middle credit score of 700
- A home mortgaged to 60% of value is eligible for a Jumbo renovation loan of up to $1,000,000 at credit score of middle 680
- 6 months Reserves equal to the total monthly payment including principal & interest, property taxes and home owner’s insurance are required for the Jumbo renovation loan; Retirement funds may be used for Reserves
- The Debt to Income ratio, that is sum of all monthly debt payments, including the home, divided into gross monthly borrower(s) income is max of 43%
- Any increase in the footprint of the property, either UP or OUT, is limited to a maximum of 5% of total square footage
- A 10% Contingency Reserve or emergency reserve is required calculated on the base rehab budget but if never used it is refunded to you at completion as a principal reduction to the loan size
- If not all utilities are turned on then Contingency Reserve increases to 20% of the rehab budget
- Architects plans required when removing a wall or other structural changes
- Repairs allowed include addition of a garage, finishing an attic or basement, new kitchen, baths, outdoor living spaces, swimming pools, etc. – basically items that add value to a home and are permanently affixed
- An initial Draw of 10% of the renovation funds is paid out to Contractor at Closing with 4 additional Draws during the construction period
- Licensed Contractor(s) required- borrowers cannot do their own work
- Contractor receives 10% of the renovation budget at loan Closing but subsequent funds are paid out in arrears, after work is completed, not in advance of doing the work; Contractor must have the financial ability to fund the project until the next Draw of funds is given
- The renovation has a 160 day completion time but extensions possible for weather delays, etc.
Now that I have stated the Jumbo renovation loan parameters and guidelines, I would like to provide two quick examples of how it may work. One for a refinance of an existing mortgage to allow a home owner to renovate their current home and one done at purchase time of a new home to renovate immediately.
If a home owner has a current mortgage of perhaps $400,000 and plans to spend $200,000 to remodel the home to add a new garage, add additional baths, new infrastructure, etc. then a Jumbo renovation loan would be used. The total loan size would be the $200,000 base rehab budget + 10% Reserve of $20,000 + $400,000 to pay off the current loan and replace it with a Jumbo renovation loan for $620,000 (this size loan is currently, in most areas of the country, beyond the typically Fannie Mae, Freddie Mac and FHA 203K renovation loan limits).
Future, ARV (After Renovated Value) of the home is found by a local licensed Appraiser to be $775,000 with all improvements, which means the new $620,000 Jumbo renovation mortgage is 80% of that value. The renovation portion of the loan is not more than 30% of ARV as well.
For a buyer wishing to purchase a new home for $800,000 and add in $250,000 for various updates and remodeling, a Jumbo renovation loan would work well. Here the purchase loan would be calculated using a base of $250,000 (the max size of the Jumbo renovation dollar portion of the loan at this time) for a total transaction of $1,050,000 (a required $25,000 Contingency Reserve is brought in cash at Closing by the Buyer since the rehab portion of the loan is at max already). The down payment is 20% of that transaction cost or $210,000.
The After Renovated value (ARV) of the home is found to be $1,300,000 by a local licensed Appraiser. So the $250,000 rehab portion is not more than 30% of ARV. The total loan size is then $840,000. Or the cost of the home, $800,000 + $250,000 rehab portion = $1,050,000 X .20 = $210,000 down payment leaving a mortgage size of $840,000.
In the right situation, meeting all the guidelines, this Jumbo loan can be a solution when the loan size needed is beyond current Conventional or FHA 203K renovation loan limits locally.
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!