Whether or not you’re a handy person, many people contemplate buying a home that needs renovations. Some people consider renovations new paint, while others are talking about a full gut job on a house. The first thing you need to ponder is how to finance a home that needs renovations.
Before you scroll any further, NONE of these loan programs will allow you to do the repairs yourself. You will have to hire a licensed contractor.
Renovation Financing Option #1: Conventional Loan
If you’re looking to gut/renovate an entire house or even converting a double to a single, you can use a conventional loan.
Two appraisals will be needed for this project though. There will be an initial appraisal completed and then a modified one after the work is completed.
While this is the easier route to go, not everyone will have the downpayment money or the credit score to qualify.
Renovation Financing Option #2: FHA 203k
For the folks who need a lower down payment, an FHA 203k loan can help you get a home renovated. This loan type allows you to still only put down 3.5% – but there are still other factors.
Things to keep in mind:
- You will have to pay a HUD consultant approximately $900-$1000 to make a site visit. You will also have to provide them with a FULL list of all planned renovations.
- There is no self-contracting. This means you cannot do any of the work yourself. Additionally, you cannot hire any family members to complete the work either. Even if your dad is a contractor.
- The selected contractor needs to be licensed and they have lots of paperwork to fill out too.
- The contractor is sent money (aka draws) AFTER your HUD consultant verifies the work. Which means, your contractor has to provide permits and supply work before they receive any draws.
- You also need “reserves” in the bank. Depending on what your consultant says, it could be 10-15% of the renovation costs.
- There is a full and streamlined version of the FHA 203k loan. The streamlined version is for renovations under 35k.
Why these don’t always work out:
Contractors do not like starting work before they get paid. It’s difficult to find a contractor that will agree to these parameters.
Renovation Financing Option #3: Home Style Loan
It’s very similar to the FHA 203k. You will be required to pay a HUD consultant and require reserves.
There is also a 10% holdback from each draw until all repairs have been approved.
Again, finding a contractor to agree to the parameters will be challenging.
Renovation Financing Option #4: HELOC/Personal Loan
After speaking with many loan officers who assist in renovation loans, many of them suggest buying the home and then acquiring a HELOC to fund the renovations. Going this route means you don’t have to pay a contractor to paint – you can handle that yourself.
A personal loan is another option for your home updates as well. Same as the HELOC, you can opt to do some of the work yourself – and have family help too!
At the end of the day, it’s best to sit down with a local loan officer to understand the differences in these loan types and what you’re getting into. Not all loan officers can fund these different routes. Also, not all loan officers are familiar with these options. Make sure you are speaking with one that is well-versed in construction and renovation loans.
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