Struggling to find a home you like but posses the vision of what you can do?

Posted by Erik Coombs on Monday, July 16th, 2018 at 12:33pm.

House hunting can be just as difficult as it is amazing. It can be challenging to find a house that perfectly suits all of your needs and preferences. Even though it is important to check off as many boxes as possible on your list, don’t give up on a house right away just because it doesn't meet your vision for your new home. If many of the core needs are met, renovations can potentially be made to get you to realize your vision. If a house that demands some love and care, consider if the unpleasant features could be addressed by renovations. 

Renovation mortgages make it possible to finance the purchase price, and the renovation costs, using one loan. Renovation mortgages can be used when buying homes, or to refinance a current mortgage, and include the costs of repair, renovation, or remodeling. These mortgages typically have lower interest rates than personal loans, credit cards, and other types of unsecured debt. However the rates and costs are a bit higher than traditional mortgages.  For this reason, the renovation mortgage is not typically a long-term solution, but rather a means to complete those upgrades and renovations without needing cash or a high rate unsecured loan.  To qualify for these mortgages, you generally need a credit score of 620 or more, with very few exceptions. These mortgages are available for both first time homebuyers and those who have owned residential real estate. The minimum down payment amounts vary depending on loan program but could be as low as 3% of the purchase price and renovation costs. FHA 203K, Conventional Homestyle Renovation, and VA Renovation are the most popular programs that are used. There are some key pro’s and con’s to consider. 

Disadvantages of Renovation Mortgages: 

Increased Cost:

Renovation mortgages are a bit more costly than traditional mortgages due to the additional risk to banks, additional steps for the parties involved in the underwriting and approval, as well as the additional administration cost to manage the renovation projects and fund disbursements after closing.  For this reason, the renovation financing options are most likely not a long-term mortgage solution, and you will want to look at refinancing the mortgage once the renovations are complete. 

More Time for approval:

Because of the addition of the renovation project to a typical mortgage, there are additional steps to be taken and additional items for review and approval.  Plans and specs need to be reviewed, contractors need to be approved, and appraisal take a bit more time to establish an “after-improved” value. 

Advantages of a Renovation Mortgages: 

More Money for improvements:

With this type of mortgage, you can finance the costs of improvements, and the financing is based upon the “after improved” value of the property.  Conversely if you are looking at HELOC’s, Home Equity Loans, or other financing options with the home as collateral; you will only be able to base the financing on the current value of the home. 

Make a home yours:

By including renovations, you get a chance to choose what you want and make the home how you want it. This makes it possible to transform a house into something that you may not have thought possible.  You can take a home that is in the perfect location, school district, neighborhood, etc. and renovate the home to meet your needs and wishes. 

Convenience:

One Mortgage covers the acquisition cost as well as the cost of renovation. 

Potential for immediate equity once the improvements are complete:

It is very possible that you gain more in market value than the cost of improvements that are made.  For instance, if you purchase a 2-bedroom home for $300,000 that needs to be updated and along with the updates you add a bedroom or two through an addition or finishing a basement.  Assume those renovations cost $40,000 so your total cost is $340,000.  After the work is complete, you will now be comparing the home to other homes with 3 or 4 bedrooms.  Maybe 3 or 4-bedroom homes that are updated are selling for $375,000 - $400,000.  You have just created equity for yourself of $35,000 to $60,000 in this example.

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