Options For Financing Rehab And Home Repair
When you buy a home, whether to occupy or as an investment, no lender is going just to give you cash at closing and hope that you do the right thing; being smarter than that is how they stay in business. Fortunately, if you do need to find some cash to renovate or upgrade the property once you take ownership, there are a couple of options available to you.
If you hope to get cash at closing for home renovations, your best bets are either an FHA 203(k) program home loan or a Fannie Mae HomeStyle loan. Both of these programs provide practical solutions to funding your home upgrade and protect the interests of the lender at the same time.
The FHA 203(k) Home Improvement Loan
Section 203(k) Rehab Mortgage Insurance from HUD allows buyers to purchase or refinance, and rehab a property simultaneously. This policy insures up to the final, rehabilitated value so that borrowers can pay a discounted price and adds the value through repairs and refurbishment.
The cost of rehab must be at least $5,000, and the FHA mortgage limits still apply to the final value of the revitalized home. HUD provides a list of the permitted repairs, which range from the simple to the drastic. You can essentially rebuild a structure using this program. The Section 203(k) program is available through FHA-approved lenders.
There are some drawbacks to this program: Not all properties will qualify, there are funding limits, and the application process is complicated. Even so, they make repairs affordable, and the down payment requirements are low, in line with FHA lending.
The HomeStyle Loan From Fannie Mae
Fannie Mae offers something like a construction loan with the HomeStyle Renovation loan. This facility is available for purchasing or refinancing primary residences of up to four units and the minimum construction cost is, again, $5,000. Unlike the 203(k) program you can use it for some types of single-unit investment properties.
The deposit requirements depend on the kind of property; single unit owner-occupied have the lowest deposit requirements at five percent of the sale price if it is a fixed rate loan or ten percent for an ARM. The deposit requirements are higher for multi-unit properties, second homes, and investment purchases, or refinances. You should consider your options carefully and discuss them with an experienced lending professional before you commit to any of them.
The HomeStyle loan allows you to draw up to fifty percent of the appraised post-renovation value for costs of repair and construction. The improvements to the property must add value to it to qualify for inclusion in the loan.
The project must finish within six months, and you will have to make mortgage payments throughout the construction period. Like the 203(k) program the application process is extensive, you will need to hire a general contractor or other licensed professional to develop and submit your plans before you receive approval for the loan.