Buying a Home - Can I borrow extra funds for repairs?
Often someone in the home buying market asks if they can borrow extra funds to repair or upgrade the home. In general the answer is NO. Lenders lend on properties at a maximum loan amount based on the LESSER of the appraised value or sale price. If a home appraises for less than agreed upon then the appraised value will be used.
When buying a home the sale price is based on the condition of the property at the time. It is easy enough to imagine a lender would not consider lending substantially more than the property is worth. They follow guidelines from Fannie, Freddie, FHA, etc that dictate the maximum they are allowed to lend.
Having said this there are home renovation type loans in the market. A home can be purchased with the intention of improving it utilizing one of these programs. It can be daunting to meet all the standards of such a program and wrestle with the months long process of getting the job completed. As a result it may not be something a first time buyer might be wise to do. Typically they do not allow a home buyer to just get the money and do the repairs themselves, contractors are involved and they must be insured, experienced, and reputable.
The renovation type loans can be an issue if a home buyer is already at the maximum they can afford in housing. If one is qualified for a $130K purchase for instance but want to borrow another $30K for improvements then the loan would fail the debt to income ratio test.
Sometimes a different approach such as an equity line can be utilized to do improvements. These are not as expensive to take out and offer more flexibility as to the process of getting the work done.
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