Mortgage programs can pay for home renovation
Saturday, September 10, 2011
By Polyana Da Costa, bankrate.com
Two little-known home renovation mortgage programs offer solutions for buyers and homeowners who want to renovate.
Fannie Mae and the Federal Housing Administration have home renovation mortgage programs that allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed. Homeowners can also use both programs to refinance their existing mortgage, plus the renovation costs, into one loan.
FHA's 203(k) program and Fannie's HomeStyle Renovation Mortgage have been around for years.
"A couple years ago there wasn't as much demand for these loans," says Leesa Sandoval, a loan officer with PrimeLending in Dallas who specializes in renovation mortgages. "But now they are great to get some of this [housing] inventory sold and get these foreclosures out of the market."
The FHA insured 22,491 home renovation mortgages in the 2010 fiscal year -- more than six times the number it insured in 2007, according to the agency's latest report on 203(k) loans.
Dustan Shepherd, a loan officer and 203(k) specialist with BNC National Bank in Overland Park, Kan., says while demand for the rehab loans is up, many borrowers are not aware of the programs or think they are too complicated.
Unlike credit lines, these renovation loans require borrowers to show the money was spent on the house. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection before a "draw"-- when a portion of the money is disbursed to the contractor. Borrowers have up to six months and five draws to finish a project. The HomeStyle program does not require a consultant to monitor the work, only an initial and final inspection.
While rehab loans involve more work than traditional mortgages, they can help those who want to buy discounted homes that need repair.
Mr. Shepherd says he recently helped a couple that bought a foreclosed house in Kansas City, Mo., for $26,000 and borrowed $136,000 to renovate the property. An appraisal estimated the home would be worth about $135,000 after the work is completed. The couple was able to take out an FHA 203(k) mortgage totaling $144,000, which covered the price of the house, renovations, and loan costs, minus a down payment. "It's a great way to buy low and renovate to the buyer's specific style and taste," Ms. Sandoval said.
But how do you know which loan is better? It depends on the situation.
Those who don't have great credit should probably opt for an FHA 203(k). Most HomeStyle lenders require a credit score above 680. To get the best rate on a HomeStyle mortgage, borrowers need to have a minimum 740 credit score, Ms. Sandoval says.
For borrowers with credit scores lower than 740, it's best to compare estimates, Ms. Sandoval says. FHA does not set a minimum score requirement for 203(k) loans, but many lenders require a score of 640 or greater. There are a few exceptions and some lenders accept scores as low as 600, Mr. Shepherd says.
Under the FHA's 203(k) program, borrowers can get a mortgage with a down payment as little as 3.5 percent. HomeStyle requires a minimum 5 percent down payment.
The FHA 203(k) program is available only for owner-occupants. The HomeStyle program allows investors.
The 203(k) rehab mortgage must comply with FHA loan limits. The limit varies by county but is $271,050 in most places. In high-cost areas, the limit is as a high as $625,500 starting Oct. 1. The upper limit in highest-cost areas is $729,750 through September.
With a 203(k) loan, borrowers can get up to 110 percent of the home's appraised value, compared to 95 percent with a HomeStyle loan. Both appraisals are based on what the house is expected to be worth after repairs.
For more information call Dustan Shepherd at: 1-800-689-6001 or email him a question at: info@203kkc.com
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Renovation means dreaming big and making dreams come true. Only by carefully planning ahead and having the right motivation can you turn all your plans into a reality.
ReplyDeleteObtaining a mortgage for a property that's not up to standard or obtaining financing for your own home renovations based on the equity already in the home is a fairly standard procedure. However, depending on how extensive the renovations are and how much you're asking to borrow, you may need to provide a number of additional documents to obtain that loan.
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