Understanding How a Renovation Loan Works

Mortgage and Lending with HomeBridge Financial Services NMLS# 184490


Understanding how a renovation loan works is key to for a successful closing!  Every renovation loan (from FHA 203k to Fannie Mae HomePath or HomeStyle) can present a different scenario although the basic flow or process of the loan is similar for all renovation loans. 

Simply put these loans only have the added step of obtaining a bid from a general contractor and ordering the appraisal for the after improved value but let's look at it in a bit more detail.

The basic structure of the product works like this:

*Home goes under contract for the “as is” purchase price

*Buyer has a home inspection and a feasibility study (for HomeStyle/HomePath reno loans) or 203k work write up for FHA reno’s

*Items are identified that MUST be repaired, recommended repairs and of course the desired repairs

*A General Contractor provides a detailed bid with repair items broken out by labor and material

*Appraisal is ordered with the detailed bid and the value is provided on an “after improved” basis - this allows us to finance the cost of the work being proposed

*Loan goes to Underwriting and to Renovation Department for project approval

*Loan Closes and Funds - in Texas contractors must be at closing - NO WORK IS DONE UNTIL AFTER THE LOAN CLOSES

*Project starts and funds are disbursed on an inspection/draw basis

*Upon completion a final walkthrough, sign off and final funds are disbursed any unused funds will be applied to the principle of the loan

I mentioned the loan types above but you probably want to know more about them.  Below you will find some brief descriptions of each.

FHA 203K Renovation - FHA Financing: Max Loan limit set by HUD for Texas is approximately 271,050.00 – this will vary from county to county

The program will allow for the purchase of the property and rehab cost to be rolled into the loan. The minimum requirement of $5,000 and a max of 50% of the after improved value. Major and structural repairs (i.e. foundation and roof) are allowed. Also can include cosmetic remodeling and updating of kitchens, bathrooms etc. The down payment required is 3.5% and is limited to primary residences.  If needed we can go to 110% of the "after improved" value of the home.

FHA 203K Streamline Renovation - FHA Financing: Max Loan limit set by HUD for Texas is approximately 271,050.00 – this will vary from county to county

This program is a streamlined version and has a limit to repairs at a maximum of $35,000.00. The required down payment is 3.5%. These repairs should be of the cosmetic nature and include paint, carpet, counter tops etc.  Same as the full 203k, we can finance up to 110% of the after improved value!

FNMA HomeStyle Renovation - Conventional Financing: Max Loan $417,000

This program is designed to allow borrowers to roll in the cost of repairs, remodeling, or renovation to the property. Luxury items, such as pools or outdoor kitchens, may be repaired or added under the program along with structural and cosmetic repairs and upgrades. The down payment is 5% for a primary residence.

FNMA HomePath Renovation – Conventional Financing: Max loan amount is $417,000.00.

This program is designed for properties that are currently owned by FNMA as a result of foreclosure or other similar action. Repairs and renovations are allowed to be rolled in and can be structural and cosmetic. There is no mortgage insurance required with this loan. The down payment is 5% for a primary residence and 10% for a second home.  No mortgage insurance is required on HomePath eligible properties!

See…nothing to be scared of!!  Repairs don’t scare me and they shouldn’t scare you either!!  Call me today and let’s get renovation loan knowledge added to your bag of tricks for getting homes sold!

Comments (1)

Jeanne Dufort
Coldwell Banker Lake Country - Madison, GA
Madison and Lake Oconee GA

Good basic description.  Of course, DECIDING what to do is an important step, and must be done before confirming the loan.

Dec 09, 2013 06:45 AM