Lendid Home Loans Blog

Home Renovation Loan: Turn That Fixer-Upper Into a Dream Home

home renovation loan

You don’t have to buy your dream home. You can build it…with a home renovation loan.

And, no, I don’t mean you need to take on the colossal project of building your first home from the ground up.

The right home renovation loan can make your dream home a reality, even if you’re a first-time homebuyer.

Fixer-uppers are becoming increasingly attractive to first-time homebuyers.

The housing market is tough right now. Especially for first-time homebuyers.

Housing inventory is low. There are more people who want to buy houses than there are houses that they want to buy. And there are a lot of reasons for this. Homeowners are increasingly choosing to age in place. Others are choosing not to downsize because they’d rather stay in the home they love than have to fix up another one.

For all these reasons and more, if you’re a first-time homebuyer, a fixer-upper could be a really smart move.

You get into your home for a lower purchase price [which could also mean low or no down payment]. Once you’ve made the renovations to make that place your dream home, you’ve added a ton of value that will be all yours when you decide to sell. When you buy low and add value, you’re able to build way more equity than you would’ve buying a pricey dream home right off the bat.

A home renovation loan can turn that fixer-upper into your dream home.

A renovation loan means you don’t have to settle for a house you know you’ll outgrow.

Whether you want to open up a floor plan, update the kitchen and baths, or make that house super energy efficient, there’s a renovation loan for that.

And not only can these loans help you turn your starter home into a dream, but they’ll cover your housing costs during construction too. That is, unless you prefer living in a construction zone, of course.

FIND OUT IF YOU QUALIFY

Home renovation loans are great for first-time homebuyers.

You might be more familiar with the renovation loans available to people who already own their homes, and especially people who already have equity. [How else do you think the Johnsons next door got that new kitchen last year?]

Loans like a Home Equity Loan, Cash-out Mortgage Refinances, FHA Cash-out Refinances, or Home Equity Loans and HELOCs are all useful for homeowners [each presenting upsides and downsides, of course]. But they don’t help first-time homebuyers.

And, sure, you could take out a personal loan or load up the credit card and use the miles to fly to Hawaii. But…you’ll need a vacation to address the stress when you see how long it’ll take to pay off those high-interest loans.

There’s a better way.

3 Home Renovation Loans For First-Time Homebuyers

There are three types of home renovation loans that are most helpful to younger and first-time homebuyers. They are:

  • FHA 203(k)
  • Fannie Mae HomeStyle
  • VA Renovation Mortgage

With each of these loans, you can borrow your home purchase price and the cost of your renovations all in one go. What’s more, you can cover the cost of temporary housing {unless you love living in a construction zone} with any of these loans, too. So you’re warm and dry until that dream home’s move-in ready.

Check out the key differences between each loan…

FHA 203(k)

There are two versions of the 203(k). The “Standard” type allows for major rehabilitation or improvements, including structural repairs. The “Limited” 203(k) can be used for minor remodeling or non-structural repairs, up to $35,000.

You only need 3.5% to put down on the loan. And the FHA’s backing allows lenders to consider borrowers with less-than-stellar credit scores. So it can be easier to get qualified.

Fannie Mae HomeStyle

Like the 203(k), there are two versions of the HomeStyle renovation loan. The “Standard” allows for major rehabilitation or improvements, including structural repairs. The “Limited” can be used for minor remodeling or non-structural repairs, with the same $35,000 cap as the 203(k).

Unlike the 203(k), the down payment can be as low as 5%, depending your credit score. Lenders use a combination of factors, including your credit score, to determine the necessary down payment.

Another differentiator for the HomeStyle is that the loan amount is calculated based on the expected value of the home following the planned renovations. With other home loans, the lender approves your loan based on the assessed current value of the home. This key difference makes the HomeStyle a favorite for people buying fixer uppers.

Plus, you can borrow enough to cover renovation costs equal to up to 50% of the final value of the home. So if you’re doing massive, big-ticket renovations that will add big value to the home’s assessed value, look carefully at this one.

VA Renovation Mortgage

The VA Renovation Mortgage is available to veterans and can be used for new construction as well as minor remodeling or non-structural repairs.

Similar to the HomeStyle loan, the VA Renovation Mortgage allows you to borrow an amount based on the expected total value of the home following your planned renovations. However, this one caps that cost at 25% or $35000. That means, the cost of the renovations included in this loan can be equal to as much as 25% of the final value of the home [the home’s value following renovations]. Remember, the HomeStyle allows that cost to be 50% of the home’s final value.

What First-Time Homebuyers Need to Know About Getting a Home Renovation Loan

Just like any other home loan, it’s important to obtain a full pre-approval before beginning the home search.

You can’t go all DiY on that house. You have to hire licensed contractors [even if you are one] for all the work.

And you must contact that General Contractor before making an offer on that fixer upper. Make sure they can provide an estimate in a timely manner. And that they’re okay performing work for a buyer using a renovation loan.

Renovation home loans can take a bit longer to finalize than other loans. Request a 45+ day closing [if possible].

You’ll likely need to engage the help of a HUD Consultant. Texas buyers, find one who can also do the TREC Inspection.

These loans aren’t for luxuries. You can make structural repairs, put in a new roof, even get all new appliances. But you cannot use these loans for anything considered a luxury improvement. The details vary a bit from one loan to the next. Basically, no tennis courts or pools are happening on the 203(k).

You loan pays you out only once the work is completed and certified. Meaning, your contractor gets paid only once your work is certified to be complete by a home inspection.

READY FOR A RENOVATION LOAN?

Find that home you can afford, in your perfect location, and make it your dream home.

Contact your friends at Lendid. We’d love to help you make it happen.

Topics: Home Loans