Home Renovation Loans - How they Benefit Homeowners AND Homebuyers
Do you identify with one of these scenarios when it comes to buying or renovating a home?
The Scenarios
First scenario
You've found the perfect home — except for the downstairs bathroom... and the master bedroom... plus the laundry room really needs an overhaul. Okay, so maybe it's not quite perfect, yet!
Second scenario
You love your home and don't want to move, BUT you're in serious need of a bit more space and you would love to update your kitchen. However, you know home additions and renovations can be expensive.
If your prospective home is more like a fixer-upper or your current home needs some work, there are many great options to get the finances you need to purchase and/or update, making it the home of your dreams!
Home Renovation Loan
A home renovation loan is a great option whether you already own a home that needs renovations or you're looking to buy a home where renovations will be wanted/needed.
Tip: Keep in mind that when it comes to buying a home, under many loans, certain aspects must pass an inspection for the mortgage company to even approve the loan. This is something to keep in mind when buying a fixer-upper. You can ask your Real Estate Agent to provide you with details on these conditions based on your area.
Buying
Likely, if you're considering buying a home, you are also exploring your loan options. While there are many great loans to consider (especially if you're a first-time buyer, hooray!) if you are certain that you'd like to do renovation work on your new home then it's definitely worth considering a loan that allows for this.
Already own
If you already own your home but don't have enough cash on hand for the renovations you'd like, you should consider a loan that will allow for this.
Loan options
There are a few different loan options depending on your exact scenario, credit score, and end goal. Let's take a look at a few of the most common.
Fannie Mae HomeStyle
This loan caters to both buyers and current homeowners. For buyers it allows them to purchase a fixer-upper and combine the payments so that the mortgage loan and additional funds necessary to complete renovations on the home are all rolled into one monthly payment. Current owners looking to add on or make renovations can opt to refinance their current home loan and receive money in return. However, your addition/renovation budget must stay below 75% of the projected value of the home after completion.
Freddie Mac CHOICERenovation
Freddie Mac offers a very similar loan to homebuyers and current homeowners as Fannie Mae HomeStyle, with a few differences in loan amounts and requirements.
FHA 203(k)
Federal Housing Administration 203(k) loans tend to be less strict on credit scores and offers lower down payments, however lender fees may be higher. It still allows for potential homebuyers and current homeowners to only end up with one monthly payment. Two versions of this loan are available based on the project, limited (for renovations that will be under $35,000) and standard (for bigger, more costly renovations).
Home equity loan/HELOC
This loan allows you to borrow against your equity in your home to get one large lump sum of money all at once. This works well for very precise projects with a set budget. Remember that you're borrowing against your home so make sure that you can make good on the loan as home foreclosure is at risk.
Cash-out Refinancing
If you have at least 20% equity in your home you can use this loan option to refinance your home, increase your monthly mortgage payment and take out the difference in cash.
Personal Loan
Don't forget about a personal loan as it can be a great option for current homeowners who would like to renovate their home but don't have the funds on hand. It's also something to consider for a homebuyer who would prefer to keep their mortgage payment separate from a renovation loan. There will be a cap on your loan based on your credit score and interest rates tend to be higher for this type of loan.
Tip: Keep in mind that some home renovation loans are very specific about how the money can actually be used so it's important to cross-check the loan with your project list.
Home renovation loans can be a lifesaver for homebuyers and homeowners alike. The good news is that there are lots of options for home renovation loans out there! And while lots of options are good, you will also want to dive deep into your specific home needs to make sure that you've picked the best loan for your situation.
We suggest working with an experienced and knowledgeable team. A helpful Real Estate Agent and Lender can walk you through the process step-by-step, ensuring the best experience possible as you (quite literally) create your dream home! Happy home renovating!
Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.
