Financing Options: Renovation for Real!

If you are buying an “AS IS” home that requires extensive restoration, you will not be able to get traditional financing such as a straight FHA or VA loan.  Depending on the amount of repairs that are necessary, you may not be able to get a conventional loan, either.  Don’t get discouraged thinking your only option in buying a fixer upper is to pay cash.  You have other options:  Renovation Loans. 

When shopping for a lender, be aware that not all lenders offer renovations loans.   If you have a preferred lender that does NOT do them, they can refer you out to someone who does.  Gateway Mortgage is one company that does them. They know the process and do it well.  Gracen Watts is the Charleston-area contact that I work with. Get in touch with her here:  http://www.gatewayloan.com/officers/gracen-watts/

Renovation loans are added to the purchase price of the house, and financed into your mortgage.  FHA offers a renovation loan called a 203(k) loan.  This type loan requires a minimum down payment of 3.5% of the total loan-to-value. The lender will require you to get a home inspection by a 203(k) certified inspector, (which costs 2-3 times more than a regular home inspection), and you will have to get a 203(k) certified contractor to will do the work.  These inspectors and contractors are hard to find, so going FHA 203(k) may not be the easiest route to take.

Another, more cost-efficient, less stressful renovation loan is a conventional renovation loan, called HomeStyle. This loan requires a minimum 5% loan-to-value down payment.  Your home inspection can be any licensed home inspector, and your contractor must be licensed and approved by the lender.    What if you are purchasing the property as an investment that you plan to “flip”?  Your required down payment is 15% loan to value.

Let’s take a look at an example:  Your lender pre-qualifies you for $300,000.  You find a house you want to purchase that your Realtor® has negotiated down to a price of $225,000.   This leaves you with the option to use $75,000 for your renovation budget.  The house will show up as a sale price of $225,000 in the tax records, but your mortgage will be for $300,000 minus your 5% down payment.  The total loan amount you will finance is $285,000.  Once you get the A-OK, thumbs-up, pre-qualification letter from your lender, you are good to go make an offer!  Once your Realtor® negotiates your best deal, all terms are agreed upon, the contract is ratified, and you've performed your due diligence, your lender will order an appraisal.  As long as the post-construction value of the home is $300,000 (the total mortgage, which is $300,000 for this example), or more, you are good to go!

Tomorrow, we will cover what needs to happen during your period of due diligence, prior to the appraisal being ordered.  

For more information about renovation loans and pre-qualification, give me a call and I will put you in touch with a lender in your area that can best serve your needs.  Or contact your preferred lender and they can refer you to someone that services renovation loans. And of course, if you are interested in pursuing the purchase or sale of real estate in the greater-Charleston area, give me a call!

Lovin' Life in the Lowcountry,

Janie

My mission statement:  To live each day to the fullest, with excitement, enthusiasm and a strong desire to build a successful and highly respected real estate business, earned by developing relationships through consistent and predictably high work ethic of always going above and beyond, and always doing so with a creative surprise up my sleeve.