Renovation Loans 101
If you’ve been scrolling through Pinterest or Instagram pining for those amazing-looking homes, or are obsessed with HGTV, you’ve probably succumbed to the belief that renovations are:
1. Cheaper than they are;
2. Simpler than they are; and
3. You always get what you want.
Unfortunately:
1. They aren’t.
2. They aren’t.
3. You won’t.
But I’ve got good news. If you’ve fallen in love with a house but hate the kitchen, you may very well be able to finance your hopes and dreams…and turn that amazing-house-with-crappy-kitchen into an amazing house.
How so? By adding the cost of the renovation to the mortgage! Renovation loans are coming in hot on today's market.
Renovation loan programs are widely available with many lenders, including Atlantic Bay Mortgage and Towne Mortgage. While each program has different rules and procedures, they essentially work in the same way.
How Do Renovation Loans Work?
1. Get pre-approved for a mortgage so you know your maximum approval amount.
2. You find a house you love, but it’s missing that one ingredient. Or, a few ingredients. These can be cosmetic improvements or unsexy renovations. Either way, you send the listing to your mortgage broker, discuss the upgrades you want to make and then get two contractor quotes (in writing) to find out how much your dream renos will cost. Note: the purchase price + the renovation cost can’t be more than the maximum mortgage you were approved for.
3. Make the offer and send the accepted offer and contractor quotes to your mortgage broker so they can get to work finding you a mortgage that includes the renovation costs.
4. Your Realtor then submits the quotes for improvement and the lender assesses (with an appraisal) that the work you intend to do will indeed increase the value of the property. Remember: they are effectively LENDING you the funds for the improvements, so they need to be on board with the renos you want to make.
5. Once you take possession of the home, you can start the renovations. The funds for the renovation part of the mortgage are held in escrow until the lender confirms that the work has been done. You do the work, finish the project and notify your mortgage broker, who will send in an appraiser.
6. The lender receives the appraisal, and assuming they are happy with the work completed, they instruct escrow to release the money to pay the contractor.
Sounds simple, right? If everyone stays on track, it is!
Here’s who ends up happy with Renovation Loans:
Your contractor is happy because for SURE if they follow the gameplan, they will get paid.
You’re happy because you can keep your contractor accountable and you will have that new kitchen/bathroom/floors/windows etc, in your new house.
Your lender is happy because their security has improved value so they’re more than happy to lend you that extra money!
There are LOTS of other minor variations to Renovation Loan programs that simply can’t be covered in a blog. Talk to your mortgage broker and don’t make any assumptions.
But the good news is: If you’re an HGTV, Pinterest or Instagram dreamer, there are options to turn that not-so-perfect house into the perfect house for you.