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Renovation Mortgages Explained – Benefits, Eligibility and Tips

Renovation mortgages explained - a complete guide to renovation home loans

Buying a home is one of the biggest investments you’ll ever make. It’s not just a financial decision. It’s an emotional investment, too. For most people, it’s where they’ll create memories and build their lives. That’s why it’s so important to find the right home – a place that really feels like home.

But what if you find the perfect location and layout, but it needs major fixes and renovations? You might be asking yourself, “can I borrow money for home renovations?”

Yes – but not in the traditional sense. That’s where renovation mortgages come into play. In this blog post, we’ll tell you everything you need to know about home improvement financing. Grab a pen, grab a hammer, and let’s get to work.

What Are the Benefits of Home Renovation Mortgages?

Looking for a new house but can’t seem to find one that checks off all the boxes? Or perhaps you love the location of your new house – it’s in a great school district! – but it needs some work.

Whatever the case may be, a home renovation mortgage might be the solution you’ve been searching for. This type of mortgage is designed for people who want to turn a fixer-upper into the home of their dreams. With this kind of loan, not only will you be able to purchase your ideal property, but you’ll also have the funds available to make the necessary updates and changes.

Here are a few key benefits:

Only One Application and One Mortgage

The real beauty of a renovation mortgage is that you have to fill out only one application form and have one mortgage. This can be an excellent advantage when looking to purchase an old house, and you want to renovate it.

If you consider two loans, one for the purchase of the property and another for renovation, the paperwork can be complex and time-consuming. With a renovation mortgage, you save time and effort processing two loans and can concentrate instead on actual renovations.

Opportunity to Restore an Old Home with Charm and Character

Investing in an older home offers unique benefits that include more affordable prices, better locality, and an unmatched exquisite charm and character that only an older home can provide.

Sadly, many homebuyers in good locations opt to move into newer housing options instead of restoring these timeless treasures due to the condition they are in. Renovation mortgages for older homes are ideal, as they will let you retain the beauty and charm of your older home while also making any necessary upgrades.

Lower-Cost

Typically, renovation mortgages have lower interest rates when compared to taking out a personal loan or using a credit card. It may also give you more time to complete your repair work, which can help spread the cost out over a longer period and make it more affordable in the long run.

Potential Tax Deduction

Looking for a break from Uncle Sam? You may be in luck with a home renovation loan. You can unlock several deductibles, including mortgage interest, so that the cost of renovation projects will ultimately end up being more affordable.

Home Renovation Mortgage Comparison: What Options Are Available?

FHA 203K

The Federal Housing Administration (FHA) 203k loan is a great option for those who want to purchase a home in need of repair. The loan covers both the purchase price and the renovation costs. The loan is backed by the government, which makes the renovation loan rates ignificantly more affordable than what you might find when applying for a loan at your bank or credit union.

The loan has two types: the standard loan and the limited loan. The standard loan covers major repairs, while the limited loan covers minor repairs.

As a side note, there is another type of home renovation loan to consider that’s offered by the FHA – the FHA Title I Loan.

This loan is perfect for those who want to make their home energy efficient. The loan covers energy-efficient upgrades, such as insulation, windows, and HVAC. The loan has a low-interest rate, and you can borrow up to $25,000. The loan does not require equity in your property when you’re borrowing money for home improvements, which makes it a great option for those who have recently purchased their home.

Fannie Mae Homestyle Renovation Loan

The Fannie Mae Homestyle Renovation Loan is a conventional loan that is perfect for homeowners who want to purchase a property to renovate. The loan requires a 5% down payment, and you can borrow up to 50% of the property’s value after the renovation.

Like the FHA 203k, this loan covers repairs, such as roofing, plumbing, and electrical work. The loan also covers major renovations, such as adding a new room to the property.

VA Renovation Loan

The VA Renovation Loan is a great option for veterans and active-duty military members who want to purchase a home and renovate it to their liking. Like the FHA 203k loan, the VA Renovation loan covers both the purchase price and the renovation costs.

The loan has a low-interest rate and requires no down payment. The loan covers repairs, such as roof replacement, plumbing, electrical, and HVAC.

Home Equity Lines of Credit

A Home Equity Line of Credit, also known as a HELOC, is a type of revolving credit that allows you to access a revolving line of credit using your home equity as collateral. You can borrow up to a specific amount, usually up to 80% of your home’s value, and you only pay interest on the amount you use for home equity and renovations.

Once you pay off the used amount, your credit is replenished, allowing you to borrow again without any additional paperwork.

HELOCs typically offer lower interest rates than credit cards and personal loans, making them an attractive and cost-effective option for financing home upgrades for families. However, they come with some risks. If you can’t pay off the loan on time, you could lose your home due to foreclosure – so weigh this one carefully before diving in.

Cash Out Refinances

A cash-out refinance is a type of mortgage where you replace your existing mortgage with a new loan that has a higher balance, and you get the difference between the two as cash at the time of closing.

People often use cash-out refinances to finance large expenses such as home renovations. Instead of taking out a separate loan, you leverage the equity you’ve already built up in your home.

This kind of mortgage refinancing for renovations has a fixed interest rate and a fixed repayment term, which makes it a more stable option than HELOCs. Some lenders offer closing cost credits, making the process a little less expensive for homeowners.

There are cons, however. A key disadvantage of cash-out refinances is that you have to pay closing costs, which can add up to a significant amount. And remember, by taking out a larger loan, your monthly mortgage payments will increase as well.

How Does a Home Renovation Mortgage Work?

Now that you know the different types of renovation mortgages, how do they actually work?

The short answer is that it will vary depending on the type of loan you’ve chosen. In general, though, there are a few commonalities.

First, know that the loan amount is calculated based on the post-renovation value of the home and the cost of repairs and remodeling. Once approved, the funds are deposited into an escrow account, and remodeling expenses are paid for by the lender as the renovation work progresses.

Remember, you’ll need to work with a lender approved by the Federal Housing Administration (FHA) – easy peasy if you’ve chosen the FHA 203K loan.

The good news is that you don’t need to be a handyman or an expert in home renovations to qualify for the loan. You only need to show that the repairs or remodeling that you plan to do will increase home market value ratings. You can use the money to repair or replace faulty plumbing and electrical systems, HVAC systems, roofing, flooring, or add new fixtures and appliances.

You can also use the funds to add another bedroom or bathroom to your home or do a complete makeover of your living room or kitchen. It’s totally up to you!

Differences Between a Renovation Loan vs. Personal Loan

A renovation loan or a personal loan are two popular options that many homeowners explore to finance their projects. But, it’s important to have a clear understanding of the differences between these two types of loans before deciding which one is best for your needs.

One of the main differences between a renovation loan and a personal loan is the purpose of the loan. A renovation loan is specifically designed for home improvement projects, while a personal loan can be used for any personal expenses, including home renovation.

Renovation loans usually come with lower interest rates because the lender knows that the funds will go towards improving the borrower’s home value. On the other hand, personal loan interest rates are typically higher because they’re unsecured loans and don’t require any collateral.

A renovation loan typically has a longer repayment period, which can range from 10 to 30 years. This allows borrowers to spread out the payments over a longer period of time, making it more manageable. A personal loan, however, typically has a shorter repayment period of 2 to 5 years, which means higher monthly payments.

How to Qualify for a Home Renovation Mortgage

Again, the process of applying and qualifying for a renovation mortgage will vary depending on which option you’ve chosen. That said, here are the five general steps to apply for a renovation loan you should know:

1. Identify Your Needs

The first step toward qualifying for a home renovation loan is to determine your renovation requirements entirely. Start by making a list of the repairs or upgrades you desire for your potential home.

This will look different for every homebuyer. Your needs could range from merely adding a fresh coat of paint and updating light fixtures to a full-scale remodeling of one or more rooms.

Take the time to determine a rough estimate of the amount of money you will need to finance the project – that way, you can make sure you receive the appropriate loan amount.

2. Determine Your Budget

Next, calculate an overall budget for the project, including labor, materials, and any other costs involved. Keep in mind that you should be able to afford your monthly mortgage payments and the renovation loan payment without it straining your finances.

Articulate clearly your budget to your lender, and they will calculate the amount they can loan you based on your financial and creditworthiness.

3. Find a Competent Contractor

Working with a competent and reputable contractor is essential to ensure that your renovation project is adequately completed without any delays or issues.

Your lender will require that you obtain proposals from a minimum of three contractors (in most cases). Provide each of them with the same project information to ensure that their bids are equal. Once you have all the proposals, select the best contractor based on quality, cost, and other factors.

4. Submit Paperwork

The next step to qualifying for a home renovation mortgage is to complete all the necessary paperwork. Your lender will require you to provide various mortgage documentation, and possibly a credit report, as well as verifying your income. It is vital that you provide accurate financial information throughout the process.

5. Loan Closing

Once the paperwork is completed and approved, you will enter the loan closing phase. This portion of the loan process usually requires the presence of all relevant parties to sign the loan documents.

After that, the loan funds will be distributed in stages, usually throughout the renovation project’s lifespan to pay the contractor.

How Much Can I Borrow for Home Improvements?

The amount you’re eligible to borrow will depend on a number of factors, including your credit score, income, debt-to-income ratio, and the amount of equity you have in your home.

Generally, lenders will allow you to borrow up to 80% of your home’s value, minus any outstanding mortgage balances. This is what’s known as the loan-to-value ratio.

And if you’re wondering what kind of credit score for renovation mortgage is necessary, again, it varies. Usually, you’ll need a score of about 620 or higher, but some lenders may approve at 580 or above.

Is a Renovation Mortgage Worth It?

Renovation mortgages are a great way to finance the cost of home improvements. They allow you to customize your home to suit your needs and make it more livable. They are affordable, convenient and can increase the value of your home.

If you’re considering buying a home that needs repairs or upgrades, renovation mortgages are definitely worth considering.

Talk to your lender to determine what type of home renovation loan is best for you. And if you’re still looking for one, be sure to reach out to Andes Mortgage LLC. We want to do whatever we can to help you find your home sweet home.

With a renovation mortgage, you can turn your less-than-perfect home into your dream one.

Start your home renovation journey

Get answers to your questions and save thousands on your home loan by comparing different programs and interest rates. 

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