A move-in-ready, picture-perfect home is the ideal home for many homebuyers. Others find a project home too tempting to pass up, especially if they are able to get a discounted price and put their own stamp on it. Problem with many “project houses” is the difficulty of funding the projects.
After you have exhausted your savings and paid the closing costs and your down payment, it may be impossible to tear down the wall between your living and kitchen rooms, replace the cabinets and install hardwood flooring. It could take years to finally make these improvements after you add in the cost of moving and new furniture.
A home renovation loan is a great option.
What is a loan for home renovation?
While they are becoming more popular, home renovation loans aren’t nearly as common as FHA loans for first time buyers. According to FHA Handbook, first-time homebuyers account for more than 75% of FHA home purchase,” stated the Mortgage Bankers Association.
They might be.
A home renovation loan can help with a few things:
1. This allows you to renovate your home using funds that are tied to your loan. 2. It gives buyers the opportunity to buy something more affordable if they can’t afford to move in or are losing out on homes.
3. It allows buyers to quickly build equity.
This is how it works. Renovation loans combine funds for home purchase and renovation. There are many options to choose from. These are the most well-known:
Fannie Mae HomeStyle Renovation loan – “The Fannie Mae HomeStyle Loan is a single-close loan which includes the cost for home repairs in the total loan amount,” stated ValuePenguin. This loan can be used for repairs required by an appraiser or to make changes that the homeowner wishes to make. It can also be used to fund both structural and cosmetic repairs.
Fannie Mae HomeStyle Renovation mortgages require a 5% downpayment and are open to investors. Interest.com stated that a down payment of less then 25% will require a credit score of 680 or higher. Your credit score must be 700 or higher if your debt-to income ratio is greater than 36%, but less than or equals 45%. The funds can be used to repair, renovate, or improve energy efficiency. The only condition is that the modifications must be permanent and add value to the property.
FHA203(k) -This option is similar to the HomeStyle loan but it is government-backed and requires lower credit scores. FHA loans will require you to pay mortgage insurance premiums if your down payment is less than 20%. This can increase your monthly payments. FHA loans also require borrowers to pay an upfront fee. This will increase your out-of-pocket expenses.
Two different FHA203(k) loan options are available:
* Full Loan – The Full Loan is for a primary residence that requires significant or serious repairs.
* Streamline Loan – This loan can be used to make smaller repairs, and has a maximum limit of $35,000.
FHA’s loan 203(k), requires a minimum credit score 500 and a downpayment of at least 10%. Credit scores of 580 or more allow a downpayment of 3.5%, said MarketWatch. These loans cannot be used for work the FHA considers luxurious, such as installing swimming pools.