If you’re a homebuyer but the home you want to purchase is in need of some major repair, you can use a renovation loan to finance those repairs instead of pay out of your own pocket.
Where can you find renovation loans, though? What are their qualifications?
In our marketplace, the mortgage products that allow a renovation loan are the FHA 203(k) loan, the conventional Fannie Mae homestyle loan, and Freddie Mac’s CHOICE Renovation loans.
In the case of FHA 203(k) renovation loans, neither of them have a limit in terms of how many repairs can be done, but any repairs that cost over $35,000 require a HUD consultant. Basically, the consultant makes sure the costs are in line with the overall average and that the work is on time and up to standard.
In most cases, the down payment requirement starts as low as 5%, but if you qualify as a first-time homebuyer, 3% is also available. The down payment is based on the purchase price plus the cost of your repairs. For example, if you buy a $300,000 home and make $100,000 worth of repairs, $400,000 is the number they’ll base your down payment off of. You also need a credit score of at least 620 to qualify.
The great part about renovations loans is they don’t require the home to be owner-occupied—you can use it for an investment property or a second home. Unfortunately, you can’t use them to fix and flip properties.
When using a renovation loan, the value of the home is based on what it would appraise for after the renovations are made. Continuing with the example above, your home’s value could increase above and beyond $400,000 depending on the comparable sales in the surrounding neighborhood. In other words, you’d be walking into equity in a situation where you otherwise wouldn’t be.
If you’d like to know more about the requirements for a renovation loan or you have any other real estate questions for me, don’t hesitate to reach out to me. I’d love to help you.