Renovations can accomplish a wide range of things. They can make an existing home more livable or more attractive. They can improve its energy efficiency and boost the comfort of those who spend time there. They can fix something that’s broken, renew something that is outdated, or customize features to better suit the home’s residents. Although the desires that drive renovations vary widely, one thing is certain: Completing a renovation project costs money. Home renovation loans are one way that homeowners can gather the capital needed to fund their projects. How do home renovation loans work?
How Do Home Renovation Loans Work?
When it comes to home loans and other financial products, smart consumers know that the details matter. How do home renovation loans work? That depends on which home renovation loan you’re using. There are several different products available, so it’s important to weigh their requirements and choose one that fits your plans.
Fannie Mae HomeStyle Loans
A Fannie Mae HomeStyle loan allows homeowners to fund their home purchase and renovations totaling up to 75 percent of the home’s projected value after those renovations are completed. Borrowers may have up to four of these loans at a time and can use them for primary residences, vacation homes, or investment properties. There are no income limits, but a minimum credit score of 620 is required, and the debt-to-income ratio must be at or below 45 percent. Both fixed-rate and adjustable-rate loans are available. Any repair that is permanently affixed to the property and adds value is allowed, but all renovations should be finished within one year.
FHA 203(k) Loans
The Federal Housing Administration (FHA) offers two renovation loans: the FHA Limited 203(k) mortgage and the FHA 203(k) mortgage. With both of these loans, the borrower takes out a single loan. From those funds, the purchase price or existing mortgage payoff is transferred to the seller or lender. The remaining funds are placed in escrow to pay for the renovations as they are completed.
What makes these loans different? The FHA Limited 203(k) mortgage lets borrowers add up to $35,000 in renovation funding to their mortgage to pay for renovations, repairs, or upgrades to their residence. Meanwhile, the FHA 203(k) mortgage provides a way to pay for more extensive renovations. With this loan, the repairs must be at least $5,000 and can stretch to cover a full reconstruction. While the finished home must meet certain standards for energy efficiency and structural concerns, there is a great deal of leeway when it comes to allowable renovations. Major structural work to the home and site is acceptable. Cosmetic upgrades, structural repairs, and updates to major features and systems are also okay.
VA Home Renovation Loans
Thanks to a guarantee from the Department of Veterans Affairs (VA), VA renovation loans come with very attractive terms. Borrowers with no down payment can take out a single loan that covers the purchase price or mortgage payoff and provides up to 25 percent of the property’s projected “as completed” value. Again, the money for the renovations is held in escrow while the renovations are performed. It’s released as the homeowner approves the work. However, the work must be done by a VA-approved contractor and completed within 90 days. Major structural changes are not allowed. Instead, the money should be used for projects that improve, repair, or update the structure and its systems with the goal of ensuring the home is safe, sanitary, and sound.
EZ “C”onventional Loans
For borrowers who want to use a conventional home loan, the EZ “C”onventional loan offers a way to roll in the cost of renovations. The renovations can be either requested by the borrower or required by the appraiser, but they must be non-structural and add value to the home.
Jumbo Renovation Loans
Jumbo loans are used when a home’s purchase price exceeds the conforming loan limits. Jumbo renovation loans serve a similar purpose. They are an option when the price tag for a fixer-upper is higher than conforming loan limits. The funds intended for renovations cannot be used for structural repairs. They may only be used for basic repairs and upgrades that add to the property’s value.
How do home renovation loans work? Which of these loans can help you make your dream home a reality? At PrimeLending of Denver, we listen carefully to your plans and work with you to get the right loan for your needs. Contact us today to get started.