Renovation Loans- Broken down by an Expert!
We love helping our first-time buyers make smart investments sometimes by considering homes with great bones that might need some love.
There are lots of factors to this decision, but it is helpful to know that renovation loans are sometimes a valuable, overlooked source for new buyers to create the home they want with a lower initial home buying investment.
To get y’all the most informed perspective, we recruited our friend Bill Holleman a Sr. Loan Originator at PrimeLending to answer some of our FAQs from our homebuyer community! Below you will find our interview going over what renovation loans are and his advice.
Since there are a few ways to get a renovation loan, for the purpose of this interview, Bill focused on referring to the FNMA HomeStyle renovation product.
“ “Reno loans are a great way to combine a home purchase or refinance with home improvement financing in one loan with one closing. They provide a convenient way for borrowers to make renovations, repairs or improvements with a first mortgage rather than a second mortgage, HELOC, or other more costly financing method.””
What is a reno loan?
Renovation loans are a great way to combine a home purchase or refinance with home improvement financing in one loan with one closing.
They provide a convenient way for borrowers to make renovations, repairs or improvements with a first mortgage rather than a second mortgage, HELOC, or other more costly financing method. Funds can be used for repairs or renovations that are permanently affixed to the property
Who should consider a this type of loan?
Anyone who wants to combine the cost to build and cost to remodel into one loan at the time of the closing or anyone who is looking to buy a fixer-upper.
If you’re looking at purchasing a house that would not meet FNMA or FHLMC property requirements (if the house needs work or the appraiser points out obvious deficiencies) you would want to do a renovation loan.
What are the pros/cons of getting a reno loan?
Pros
Combine the cost of renovations into one long term loan program
Cheaper monthly payment
Don’t need to wait until after closing to find the cash – or to find an alternative way to finance the renovation
Get the updates you want now
Cons
A renovation loan adds a new party (or many new parties) to a loan transaction since a builder/contractor sub-contractor bid is required and this can add stress
You need to find a contractor and get bids early in the process
Finding a “discounted” fixer-upper can be difficult
What is the step by step process from application to finish for reno loans?
Apply for a loan to get pre-qualified for a max mortgage amount – this is where we’ll figure out borrowers maximum loan limits
Submit documentation to Lender
Pay stubs, W2s, Bank Statements,
Obtain bids from a contractor and choose the contractor
Best to look at a few different contractors
Once you select a contractor, we will approve the contractor
The bids are very important because they determine the maximum loan amount
Loan To Value (LVT) is determined by the lower of the:
i. AS-completed appraised value
ii. Cost to purchase + renovation costs
We can go as high as 95% loan-to-value ratio for 1 unit Owner occupied
i. 85% for 2 unit owner occ
ii. 75% 3-4 unit Owner occ
iii. 90% 2nd home
iv. 85% investment property – 1-unit
5. Once the contractor is chosen and bids are received, we submit to our renovation team for project/contractor approval.
6. Appraisal ordered
7. The loan is submitted to underwriting
8. Close and fund
What are the top 3 things to consider when getting a reno loan?
Find an honest contractor
Get bids as soon as possible
Be flexible
Alright, that’s a quick rundown! Next…
You should connect with a lender if you haven’t already! They can share their unique system for this type of loan product. We provide local lender recommendations after a quick buyer consultation call. You can book one here at your convenience!