Sometimes, when searching for a house, all you find are fixer-uppers. You can buy the house, but where do you get the money for improvements? According to Bankrate, “Many people don’t realize that there are real estate investing renovation loans that can help pay for your housing upgrades. Whether you need money for a new roof or an outdated kitchen, there exists a mortgage right for your fixer-upper.”
With renovation loans, you can get one home loan that combines the purchase price with the cost of improvements. Here are your options and what you should know about each one.
Two Types of Real Estate Investing Renovation Loans
The two major types of renovation loans are the FHA 203(k) loan, insured by the Federal Housing Administration, and the HomeStyle loan, guaranteed by Fannie Mae. Both cover most home improvements, whether major or minor.
Both FHA 203(k) and HomeStyle are used for structural and cosmetic renovations. With both loan types, renovation work may begin immediately after closing.
FHA’s 203(k) loan is for primary residence s only. It requires a minimum credit score of 500 with a down payment of at least 10 percent. A credit score of 580 or higher allows a down payment of 3.5 percent. These loans aren’t used for work that the FHA deems a luxury, such as installing a swimming pool.
There are two types of 203(k) renovation loans: limited and standard. For renovations costing $35,000 or less that don’t require major structural work us the Limited. Use the standard for projects upwards of $35,000 or involving major structural work.
A 203(k) standard loan requires a HUD consultant, who helps the homeowner solicit and analyze bids and oversees inspections of the work. Consultants are often contractors, architects or inspectors, HUD has a tool to search for consultants.
Fannie Mae’s HomeStyle loan may be used to buy and fix up a primary residence, second home, or investment property. It requires a minimum credit score of 620. The minimum down payment is typically 3 percent or 5 percent and can be up to 20 percent. It’s all dependent on whether the home is owner-occupied and the borrower is a first-time homebuyer or has a low to moderate income.
Pitfalls to Watch For
The most common problem is failing to get detailed cost estimates. To prevent cost overruns, make sure estimates are specific about materials and include costs for inspections, permits, and consultant fees (if applicable).
After finding the house you want, choose a lender, decide on a real estate investing loan type, and hire a HUD consultant. Then, with the consultant’s guidance, get estimates from contractors. Your lender will need copies of the estimates.
The renovation work may begin immediately after you close the loan.
When the improvements are complete, you’ll have your home the way you want it. Oftentimes, sooner than you might have thought possible.
There are also real estate investing renovation loans for owner-occupied houses that use the equity as collateral for home improvement loans. The loans to value can be as high as 85% to 100%. Essentially, you will have a second mortgage. You want a fixed interest rate and the term of the loan as short as you can get to save on interest charges.
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