If you feel like your recent house shopping efforts are reminiscent of an overcrowded community pool, you’re not alone. It’s true that housing inventory is tight right now, and the competition is fierce. But there is an alternate solution.
Go out into open waters and consider a home that has the bones you absolutely need – location, layout, and land. Then use your mind’s eye to envision it as the perfect place for you with new cabinetry, flooring, countertops, and paint, whatever you can imagine, because you can make the home of your dreams with a renovation loan.
Renovation loan or home improvement loan?
Like the difference between the kiddie pool and the deep end, there are also differences in a home improvement loan vs a renovation loan. Home improvement loans are unsecured personal loans and really aren’t suitable for most projects because they have high interest rates, shorter terms, and a limited loan size. So, what’s a renovation loan, and why might it be better for you?
The benefits to getting the job done with a renovation loan
The kitchen? The master bathroom? A new walk-in closet? If you want it remodeled, you can make it happen with a renovation loan. When you take out a loan, it will affect your interest rate, monthly payment, the amount that you can borrow, or a potential need to refinance. But here’s what makes a renovation loan so special …
A renovation loan is based on the future value of your home (after the renovation is complete) — not its current value. This gives you significantly more borrowing power to make a good home the absolutely perfect one.
There’s another benefit to renovation loans. Because your lender bases everything on the after-renovation value of your home, you get the lowest rate possible, because you’ll have a smaller loan-to-value (LTV) ratio. They can also easily find a way to incorporate the renovation loan into your mortgage, so you can make one payment each month.
Other loan options (without the same benefits)
Sure, you could use a cash-out refinance or home equity line of credit (HELOC) for renovations. However, you won’t get the same benefits that a renovation loan provides because it specifically exists for home renovations. This is a huge benefit to a newer homeowner, because a cash-out refi and HELOC are usually based on the equity that has built up in a home, which takes a lot of time, and could leave you falling short of the amount you need to make the changes you want. That could cause you to change the scope of the project you were hoping to complete or find a second financial solution to help you make up the difference.
Types of renovation loans
Your best renovation loan option depends on your credit score, location and where you’re at in your mortgage process. There are a few different types that can all work in your favor.
Different types of renovation loans include:
- Fannie Mae HomeStyle
- Best for those with a FICO credit score of 680 or higher.
- Lets you structure a 15 or 30-year fixed mortgage, or adjustable rate mortgage (ARM), with the future renovations included in the total loan.
- You may incur additional costs, like separate product pricing and investor fees for managing the post-close construction
- FHA 203(K)
- A good option for those with fair credit.
- Some additional up-front fees are included in the principal.
- There’s a “streamline” and a “full” option:
- Streamline is cosmetic and non-structural.
- Full allows for major structural/infrastructure-systems.
- As an FHA product, your down payment could be much less than what would be needed for a conventional loan.
The bottom line
Before you consider a cash-out refinance, HELOC or personal loan, consider what you can get from a renovation loan. It’s based on the future value of your home — not the current value, or current equity that you have built over time.
A renovation loan could help boost your borrowing power. It will also help you get the lowest cost solution to financing your home renovation, and the associated fees are typically lower compared to a first home mortgage. It also works for many types and sizes of projects — so long as the renovation will increase the value of your home. Go for anything from an updated bathroom to an entire home remodel! If you’re interested in a renovation loan, or finding out more, Homespire can help.
This is not an offer for a loan or any type of extension. Eligibility for a loan or extension of credit from Homespire Mortgage Corporation is subject to completion of a loan application, credit, income, and employment qualification, and meeting established underwriting criteria. Rates are subject to change without notice based on market conditions. See Loan Consultant for information on program income limits, buyer contribution, area median income, debt requirements, and other application details.