Love the Location, Not the House? Renovation Financing May Give Buyers More Options

The Home You Want May Not Be Move-In Ready

Homebuyers often begin their search with a picture of the perfect home in mind.

The right neighborhood. The right number of bedrooms. A modern kitchen. Updated bathrooms. Newer flooring. A good roof and HVAC system. Maybe even enough room for a home office, an additional bathroom, or an accessory dwelling unit.

Unfortunately, the home that checks every box may not exist — or it may not fit the buyer's budget.

But what if you find a home in the right neighborhood, at the right price, and with most of what you want — but it needs work?

Instead of automatically eliminating that property, a renovation loan may provide another option.

What Is a Renovation Loan?

A renovation mortgage may allow an eligible borrower to finance both the purchase of a home and qualifying renovations with one loan.

Rather than purchasing the property and then trying to obtain additional financing for the improvements later, renovation costs can potentially be incorporated into the mortgage from the beginning.

Depending on the program, the loan may take into consideration the property's expected "as-completed" value after the planned improvements have been made.

That can be especially helpful for buyers who find a property with potential but don't necessarily have the cash available to purchase the home and pay separately for all of the renovations.

It can also expand the number of homes a buyer is willing to consider.

Instead of asking:

"Is this house exactly what I want today?"

The better question may be:

"Could this house become what I want?"

What Types of Improvements May Be Possible?

One of the biggest misconceptions about renovation financing is that it is only for badly damaged homes or major fixer-uppers.

Depending on the loan program, eligible improvements may include:

• Kitchen and bathroom remodeling
• New flooring
• Roofing
• Windows and doors
• Heating and air conditioning
• Electrical and plumbing improvements
• Structural repairs
• Room additions
• Adding a garage
• Accessibility improvements
• Energy-efficiency improvements
• Adding or improving an accessory dwelling unit (ADU)
• Pool repairs — or, under certain programs, even adding a pool
• Other eligible improvements

The improvements allowed vary considerably from one renovation program to another, which is why choosing the appropriate financing program is an important part of the process.

There Is More Than One Type of Renovation Loan

Different buyers and properties may qualify for different renovation programs.

Options can include:

Fannie Mae HomeStyle® Renovation

In my opinion, this is one of the most flexible renovation programs available.

HomeStyle may be used for eligible purchases or refinances and can potentially finance a broad range of improvements.

It may also be available for:

• Primary residences
• Second homes
• Investment properties

A minimum middle credit score of 620 is required for the program.

HomeStyle typically requires a minimum 5% down payment. However, eligible first-time homebuyers using the HomeReady® option may potentially qualify with as little as 3% down, subject to applicable income restrictions and other program requirements.

HomeStyle also offers considerably more flexibility in the types of improvements that may be eligible than many people realize.

FHA 203(k)

FHA's renovation program can allow eligible borrowers purchasing or refinancing a primary residence to combine the mortgage and qualifying renovation costs into one loan.

The program may be available with as little as 3.5% down for eligible borrowers, and the renovation program we offer requires a minimum middle credit score of 620.

For buyers who might otherwise consider traditional FHA financing, an FHA 203(k) can be worth exploring when the property needs repairs or improvements.

USDA Renovation Financing

Eligible buyers purchasing a qualifying primary residence in an eligible USDA area may also have a renovation option.

USDA financing may provide 100% financing for qualified borrowers, which means no down payment may be required.

The program has household income limits and geographic eligibility requirements, and the renovation program we offer requires a minimum middle credit score of 620.

This can be particularly interesting in California's Central Valley, where some communities and surrounding areas may qualify for USDA financing.

VA Renovation Financing

Eligible veterans and active-duty service members may have access to VA renovation financing for qualifying primary residences.

VA financing may provide 100% financing for qualified borrowers. The renovation program we offer requires a minimum middle credit score of 620 and allows up to $50,000 in eligible renovation costs.

Rather than automatically passing on a home because it needs certain repairs, eligible VA borrowers may have another option worth investigating.

Renovation Financing Isn't Just for Owner-Occupied Homes

One of the more interesting features of Fannie Mae HomeStyle is its potential use for eligible investment properties.

An investor purchasing a property to hold as a rental may be able to finance both the acquisition and eligible improvements with one loan.

For example, an older rental property may need:

• A new kitchen
• Updated bathrooms
• New flooring
• Plumbing or electrical improvements
• HVAC replacement
• A new roof
• General modernization

This may allow an investor to purchase a property that needs work and make qualifying improvements before placing it into service as a rental.

However, there is an important distinction:

HomeStyle renovation financing should not be confused with fix-and-flip financing.

Someone purchasing a property specifically to renovate it and quickly resell it is pursuing a different investment strategy and would generally need to explore financing designed for that purpose.

Renovation Financing Can Also Expand a Buyer's Home Search

This may be one of the most overlooked benefits.

Many buyers concentrate exclusively on move-in-ready properties.

That can mean competing with many other buyers for the same remodeled homes while ignoring properties that may have a good location, floor plan and underlying potential simply because they look dated.

Imagine finding a home that has:

• The neighborhood you want
• The lot you want
• Enough bedrooms
• A price that may work

But it has an outdated kitchen, old flooring and a bathroom straight out of 1978.

Instead of immediately saying "No," it may be worth asking what the home could look like after the right improvements.

Renovation financing doesn't make every property a good purchase. But it may allow buyers to look at certain properties differently.

Realtors Can Help Buyers Look Beyond What's There Today

A knowledgeable realtor can be especially valuable when considering a property that needs work.

The realtor can help the buyer evaluate the location, comparable properties, marketability and whether the proposed improvements make sense for that particular home and neighborhood.

Renovation financing then becomes another tool in the conversation.

A property that initially appears to be a problem may actually represent an opportunity.

Instead of trying to find a home where someone else has already chosen the cabinets, countertops, flooring and finishes, the buyer may have an opportunity to make some of those decisions themselves.

And because renovation work occurs after the purchase closes, the seller doesn't have to complete the improvements before selling the property.

Renovation Loans Require More Planning Than a Traditional Mortgage

Renovation financing does involve additional steps.

The proposed improvements generally need to be identified in advance. Contractors, bids, inspections, appraisals and other documentation may be required depending on the program and scope of work.

Renovation funds aren't simply handed to the borrower at closing to spend however they choose. Funds are controlled and released through a draw process as qualifying work is completed.

That's one reason it is important to work with a loan professional who understands renovation financing and to begin discussing the proposed improvements early in the homebuying process.

Already Own Your Home and Thinking About Renovating?

That's a different conversation.

Homeowners who already own their property may have other ways to finance improvements, including a HELOC, home equity loan/second mortgage, or other available home-equity solutions.

But if you're considering making improvements specifically because you're planning to sell your home, financing should not necessarily be the first question.

The first conversation should probably be with your realtor.

Not every renovation produces the same return, and an improvement that makes sense for one property or neighborhood may not make sense for another.

Before borrowing money or spending substantial savings on improvements, homeowners should consider whether those improvements are likely to improve the home's marketability or value enough to justify the expense.

We'll take a closer look at that question in our next article.

Don't Automatically Rule Out the House That Needs Work

If you're shopping for a home, don't assume that your choices are limited to properties that are already completely remodeled.

Sometimes the better opportunity may be the home with the right location, the right bones and the wrong kitchen.

Renovation financing may allow eligible buyers to purchase a property and finance qualifying improvements with one mortgage — potentially turning a home they might otherwise overlook into the home they wanted.

If you're considering a property that needs repairs or improvements, I'd be happy to review the available renovation financing options and help determine which programs may fit your situation.

Robert Clark
Home Loan Consultant
Firestone Financial Group
NMLS #357788 | Firestone Financial Group NMLS #301522
209-227-7745/559-476-9279

rbrtclark53@gmail.com

robertclarkloans.com

Loan programs, guidelines, eligible improvements, occupancy requirements, loan limits, credit requirements, property requirements, rates and terms are subject to change and borrower qualification. Not all borrowers or properties will qualify. This information is for educational purposes only and is not a commitment to lend.