Renovation Loans
There are properties currently on the market that were not well maintained. Maybe they were treated poorly by renters, or were deliberately trashed by former owners before they lost their home to foreclosure. Renovation loans are a great way for people to fix up these neighborhood eyesores, and bring them back to life.
These loans are tailored to buyers interested in buying a house than needs work. Rehab projects are no longer handled only by professional real estate investors who purchase these properties with cash. Now, with the renovation loan, a buyer can borrower funds to purchase a home and renovate it all in one loan.
Right now, there are 2 types of renovations loans available to home buyers. One is the HomePath Renovation Loan, and the second is the FHA 203(k) Renovation Loan. Both of these loans are available to owner occupied only. They are NOT for investors.
The HomePath Renovation loan is a product created by Fannie Mae. It is only available on Fannie owned properties. Eligible properties are listed on their website at www.homepath.com. The HomePath Renovation loan is a conventional loan. Here are some of the guidelines.
Minimum 3% Required Down Payment (interest rate is better with a minimum 5% down)
660 credit score required with less than 20% down
60 to 90 day to close
$30,000 Maximum Repairs
3 months to complete repairs after closing
Must use licensed, insured and bonded General Contractor
No mortgage insurance
Interest rate is higher with less down
Cost is approximately $1,200 to $1,500
The FHA 203(k) Renovation loan is a more widely used, so I will go into more detail on the Streamlined version of this loan.
Minimum 3.5% down payment
Minimum 640 credit score
30 to 45 days to close
$35,000 Maximum Repairs
6 months to complete repairs after closing
Can do some of the repairs yourself, with qualifications
Contractors must be licensed, insured and bonded
Up front and monthly mortgage insurance
Interest rate is slightly higher than normal FHA loans
Cost is approximately $500
One of the benefits of a renovation loan, is that you are able to purchase a home and add the cost of repairs to the mortgage. This means you do not need to use your own cash or charge the repairs after closing. I like to say you can purchase a home in a great area, at a great price, and then fix it up or customize it to fit your needs.
Eligible/Ineligible Improvements
Some eligible improvements include: modernize and improve the home’s function; eliminate health and safety hazards; improve the appearance and eliminate obsolescence; recondition or replace plumbing; install a well and/or septic system; connect the property to public utilities; upgrade or replace existing HVAC system; upgrade electrical system; repair or replace roof; replace floors; enhance accessibility for a disabled person; make energy conservation improvements to the home; repair/replace exterior decks, patios and/or porches; paint the interior and/or exterior; upgrade windows and doors; purchase and install new appliances; pool repairs limited to $1,500; non-structural repairs to detached buildings such as garage, workshop, storage building; cost for termite treatment.
As you can see, there is quite a lot you can do to “customize” your home. Ineligible repairs on this Streamlined renovation loan include any major rehabilitation project; new construction including room additions; repair of structural damage; repairs requiring detailed drawings or exhibits; landscaping or site amenity improvements.
Costs Associated with the Renovation Loan
There are three additional costs that are associated with the FHA 203(k) Streamlined Renovation Loan. These fees are paid to the Investor and are not negotiable.
Supplemental origination fee of $350 or 1.5% of the repair amount, whichever is higher;
$100 final inspection fee
$50 final title policy update
The Process – How Does it Work?
Once you have an accepted purchase contract, and prior to the Lender ordering the appraisal, you need to obtain bids for the work that will be done and included in the renovation loan. (It is usually a good idea for your Realtor to include a longer inspection period to allow you enough time to work up accurate numbers.)
I do not require 3 bids for each repair. All I need is the one bid you want to use. Bids must be from licensed Arizona contractors. The bid must show a breakdown of labor and materials. The bids are submitted to the Appraiser, who will give us an “as-is” value as well as an “as-completed” value. I need to know that the value of the property as it is now is valued at the purchase price at a minimum. Then, I need to know the value of the property with all completed repairs. Keep in mind that the appraiser may require additional repairs be done.
A 10% contingency reserve is required for cost overruns. This means that we require a cushion of 10% more than the bids, to ensure we have enough money to pay the contractors. If there are no cost over runs, you can use these funds for additional improvement after closing. In no event will you be given the cash after closing. Any unused funds will be applied to the loan as a principal reduction.
What Happens After Closing – How Do I Get the $$ for the Repairs?
You cannot start any repairs until you own the property. And you must begin the renovation within 30 days of closing.
At closing/funding, you will receive 50% of the repair amount in a check. The check is written to you, the Home Buyer AND the Contractor. The checks are usually written by the Title Company. The remaining 50% of the repair amount AND the 10% contingency reserve is given back to the lender for disbursement upon completion of all repairs. The Title Company does not hold these funds in escrow.
Once the loan is closed and funded, we package and ship the file to the Investor for purchase. Most of these loans are purchased by Bank of America. Once they have purchased the loan and entered it into their system, Bank of America will send you a Letter of Completion. This usually takes 20 to 30 days after closing.
When you receive the Letter of Completion, you will sign and fax it back to the Investor only when all repairs are completed. They will then order a final inspection to verify that the repairs have been done. They will also order a final title search on the property to be sure no liens have been filed against the property. Once these items are satisfied, the Investor (Bank of America) will send the final 50% to you and the Contractor. The check(s) are mailed to the new property address.
This process usually takes no less than 45 days from close of escrow. And it can take longer. It is imperative that the Contractors understand the process and know about how long it will take them to get final payment.
These loans are not difficult, however, it can be a frustrating process if you work with a Lender who is not experienced in them. The process is a complex one. Be sure you work with Real Estate and Lending professionals who are experts in this type of financing.
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