Transforming a drab home into your dream home isn’t cheap. According to HomeAdvisor, the average home renovation costs around $47,000. Most renovation projects will have budgets that fall between $18,000 and $76,000. Factors like the size and complexity of the renovation, the materials that you choose, regional differences, and the problems you encounter along the way will all impact the cost. Kitchens tend to average around $25,000, bathrooms run around $10,000, and basements generally cost about $20,000. People who are interested in fixing up a house and trying to figure out how to fund their efforts often find themselves asking a simple question: What is a renovation loan?
What Is a Renovation Loan?
Some people have always craved the mission of reshaping a fixer-upper. Others appreciate the chance to make the most of their housing budget in a hot housing market. Whatever your reason for settling on a home that’s in need of renovations, you’re left with a challenge. Traditional mortgages only provide funds for the purchase of the home. How do you raise additional money to fix it up? If this was a question on the long-running quiz show “Jeopardy!” then the answer would be clear: What is a renovation loan?
Renovation loans provide funds for both the purchase and renovation of the home in a single loan. The particulars of how things work depend on the loan you choose. There are various home renovation loans available.
EZ “C”onventional Loan
Were you planning to use a conventional loan to purchase your home? According to ValuePenguin, you may find that an EZ “C”onventional loan is the perfect solution. If you’re planning renovations, it can be used to get the funds needed for nonstructural repairs that add value to the property.
Fannie Mae HomeStyle Loan
A single-close loan, the Fannie Mae HomeStyle loan offers plenty of flexibility while still keeping things simple. Borrowers can choose either a 15- or 30-year mortgage term. Both fixed-rate and adjustable-rate options are also available. However, this loan can be used to cover the cost of the home and the desired structural and cosmetic repairs, so when the deal is done, you’ll only have one loan and one monthly payment. How does it work? A HomeStyle mortgage is financed based on the projected value of the home after the proposed repairs are completed. As for renovation funds, buyers can get up to 75 percent of the lesser of either the “as completed” appraised value or the purchase price plus renovation costs.
FHA 203(k) Mortgage
The FHA 203(k) mortgage provides a government-backed option for borrowers with imperfect credit. As the U.S. Department of Housing and Urban Development explains, it’s another single-close loan that covers both the cost of a home purchase and the needed renovations in one loan product. A portion of the loan is used to pay off the seller or existing loan, and the remainder is placed in escrow and used to pay off the renovations as they are completed. The cost of the renovations must be at least $5,000, but the nature of the work can vary widely. It can range from fairly simple projects to structural alterations and reconstructions. What if you have a smaller project that will cost less than $5,000? There’s a limited 203(k) mortgage that might fit your needs.
Jumbo Renovation Loan
When a home’s purchase price is over the limits set for a conventional loan, borrowers will need to secure a jumbo loan. When that home is a fixer-upper that they hope to renovate, they’ll need a jumbo renovation loan. According to ValuePenguin, these renovation loans function generally much like EZ “C”onventional loans, but they’re used for homes with higher price tags. Typically, winning approval for any type of jumbo loan requires undergoing extra scrutiny, so be prepared to make your case, answer questions promptly, and provide any requested documentation.
A renovation loan can be a fantastic way to bring new life to a fixer-upper. However, every program seems to do things a little differently. Sorting through the options to try and find the one that best fits your needs can be overwhelming. Let PrimeLending Twin Cities help. We’re very familiar with these programs and happy to learn about your housing goals so that we can work with you to find the one that’s the best match for your unique situation. Contact us today to get started.