Imagine this…you are home shopping with your realtor and have managed to narrow down the house size, neighborhood and community amenities to a perfect list of Goldilocks-worthy “just rights.” You may have even found a specific picture perfect property at an amazing price with a lovely back yard, a cozy fireplace, two or three or four spacious bedrooms…and one hideous kitchen with a sagging ceiling, peeling laminate floors and countertops that groan in the most disconcerting way when you place anything heavier than a soda can on top of them.
Before you throw in the towel on an otherwise perfect home that may be in need of a little TLC, you may want to consider one of several renovation-plus-mortgage options available to homebuyers. While not every lender offers these types of loans and the paperwork and added complications of a rehab on top of the already stressful home buying process can turn some people away, for those with the patience of a saint and nerves of steal a reno loan may be your ticket to updated kitchen paradise. So sit back and grab a notepad while we school you in your mortgage rehab options.
FHA’s 203k Loan Program
Perhaps the best known renovation plus loan option is the Federal Housing Authority’s 203k loan program. There are two versions of the 203k loan; a standard option for big ticket and traditional repairs and renovations and a streamlined version for smaller cosmetic fixes. With each, you can borrow up to 110% the price of your home, estimated after repairs, but the streamlined will require additional costs in the form of a government improved inspector who will oversee the work of your general contractor.
Yup, you read that right. You will need an approved, licensed and insured general contractor to do the repairs on a 203k loan, so self-help fanatics need not apply. Other downsides include the fact that this will be an FHA loan, which means you will be carrying mortgage insurance (hey, we wrote about that too) which will be a permanent cost for the life of your loan. On the plus side, many lenders will allow as little as 3.5% down on a 203k loan and there are typically lower credit score requirements, which will have your current disaster of a bathroom de-pink wallpaper’ed, or that mysterious person-sized hole in the family room patched up, in no time!
Fannie Mae HomeStyle Renovation Mortgage
The Fannie Mae HomeStyle Renovation Mortgage is another loan option available to would be rehabbers. With this type of mortgage you have greater flexibility when it comes to down payment since it isn’t technically an FHA loan. You can initially put down as little as 5%, which will have you carrying private mortgage insurance, but you also have the option of putting down a traditional 20% which will eliminate that pesky requirement for most buyers.
There are some drawbacks of course. With a HomeStyle Renovation loan your loan limits are smaller and the total loan amount cannot exceed 90% of your estimated appraisal after repairs. While an FHA 203k loan can only be used for basics (sorry, no indoor/outdoor pool with sauna) with a HomeStyle option, as long as the improvement is attached to the house and improves its value you are good to go. Interest rates may also run you one-eighth to one-quarter of a point higher on the HomeStyle program; only a touch less than the 203k loans. Ultimately, if you have the upfront cash, the private HomeStyle Renovation mortgage can save you in the long term over its FHA counterpart.
Other Renovation Options
While these may be the most popular loan programs for rehabbing a newly purchased house, they certainly aren’t the only ones. Depending on your specific area and other circumstances, you may qualify for one of several specialty renovation/purchase loan options. It’s important to note that both of the above government sponsored programs have hard total loan amount limits that are based on average property values in your given area. For some, depending on your home purchase location, this may make even obtaining one of these types of loans a non-starter.
If you are one of those people, or if you can make do for a little while with living in a house that has potential but needs some TLC, you may want to consider traditional home improvement loans or a home equity line of credit (HELOC) from your lender of choice. The options for financing a home rehab after purchase are numerous. In fact, breaking down all of those options would make a great article. If only we knew a super informative website who would want to write about that kind of thing.