Does your property need a few touchups? Perhaps you're thinking of buying a fixer-upper to flip for a quick buck.
In either case, a home renovation loan can give you access to the funds needed to cover repairs on your new home. These come in the form of mortgages with built-in cash outs or personal loans.
If you're buying a home in need of repairs, it's a good idea to take a look at the following options.
Fannie Mae HomeStyle
A Fannie Mae HomeStyle loan is a dual mortgage/cash-out loan option that allows homeowners to bundle the cost of their home repairs into their monthly mortgage payments. You can use the proceeds of this loan for any eligible structural or cosmetic repair.
The benefit of a HomeStyle mortgage is that it allows you to keep all of your payments in one place rather than forcing you to deal with seperate sets of mortgage, home equity and credit card payments. These mortgages are offered in 15- and 30- year terms as well as adjustible and fixed rates. The loan amount is determined by the estimated value of your repaired home. HomeStyle loans are an excellent choice for buyers with excellent credit profiles.
This is the equivelant of a HomeStyle loan for buyers who have less-than-perfect credit scores. Understandibly, it's also the more expensive of the two loan types due to the inclusion of mortgage insurance premiums in exchange for lower down payments. FHA 203(k) loans also include an upfront fee that can be financed into the total loan amount.
These are divided into two types:
FHA 203(k) Full Loans are intended for primary residences that require serious gut jobs.
FHA 203(k) Streamline Loans are issued for amounts under $35,000 and are meant to cover minor touchups.
These are conventional mortgage loans paired with cash-outs for non-structural home repairs that add value to a property. These encompass both appraiser-mandated and borrower-selected renovations. They are available from both banks and credit unions.
Jumbo renovation mortgage loans are basically E-Z conventional mortgages meant for higher-priced homes, typically worth $453,100 or more across most regions in the nation. Again, acceptable repairs can include appraiser-mandated fixes and borrower-selected renovations, and repairs must be non-structural and add tangible value to the home.
USDA Rural Development Home Repair Loans and Grants
The USDA offers these loans to help homebuyers secure safe housing and develop/improve America's heartland. Financial assistance from the USDA can be used to cover new appliances, foundational repairs, siding, roofing, windows, plumbing and other upgrades. Eligibility in the program will depend on the applicant's income and whether the home purchase falls within a targeted rural location.
Home Equity Financing
Current homeowners can tap the equity they own in their properties through a lump sum home equity loan or revolving HELOC. These second mortgages offer lower interest rates than most personal loans, and are one of the most popular ways to fund home repairs in America. If all proceeds are used for home renovations, the mortgage interest on these loans may even be tax-deductible. In some cases, you can even use the home equity in your property to buy another house.
When is a Home Renovation Loan a Good Idea?
Only consider a home renovation loan if you're confident that the repairs you make will either reduce your long-term costs or increase the market value of your property.
Keep in mind that some projects will net more value than others. Attic insulation and bathroom/kitchen rehabs can substantially increase the sales price of your home. If you're trying to get the biggest bang for your buck, make sure you're spending your money where it counts.
There are also substantial risks when it comes to taking out a home renovation loan. One of the most common errors is when homeowners misjudge the amount of funding they'll need to renovate their property. The last thing you want is to make it halfway through remodeling your dream kitchen and realize that you've already blown through 90% of your budget. Get estimates from several licensed contractors to make sure you're a) getting the best deal, and b) obtaining a reasonable estimate of your repair costs.
Alternatively, you can always charge your home renovations to a credit card. This might work well if you have a high income and healthy credit score, or if your home improvement project isn't expected to cost much. To maximize savings, open a credit card account with a 0% interest introductory period. These are offered by a number of popular credit cards and give you a year or more to pay off your project, without ever incurring interest or closing costs. Keep in mind that it can be tempting to overspend when it comes to credit cards, so avoid falling into a debt trap. Set limits and spend only as much as you can afford to pay off in full within the introductory period.
There are a variety of ways to fund your home renovations, each with its own set of pros and cons. Make sure you do your homework and have a solid understanding of your expenses as well as your ability to pay them off before going down the expensive road of remodeling your home.