Whether it’s a custom kitchen, luxurious bathroom, or the basement that makes your whole neighborhood jealous, affording the remodel of your dreams can be much easier when you have more borrowing power to your name. Fortunately, a renovation construction loan allows you to borrow against the projected value of your home post-remodel. However, the process of obtaining a renovation construction loan can often seem daunting at first glance.
Having spent over a decade remodeling homes in the Portland Metro Area, our team at Lamont Bros. has worked with hundreds of homeowners to find the best approach to funding their renovation. For many of these clients, a renovation construction loan is a great choice. Our team has collaborated frequently with the great team at Mann Mortgage in Lake Oswego to help our clients secure funding this way.
This article will cover the process of obtaining a renovation construction loan for a home remodel. Once you’re finished reading, you’ll have a better understanding of renovation construction loans and be one step closer to determining if this method is the best way to pay for your upcoming remodel. We’ll break down the loan process into 6 steps to help you understand how you can approach your next project.
Step 1: Assess the Project and Determine Budget Range
The first step in your renovation construction loan journey is to understand your project’s scope and financial requirements. This crucial first step lays the foundation for the entire loan process.
Determine the Scope of Work
The scope of work directly impacts the cost of your project and the financing limits available for it. Your first step in the process is to identify what about your home you want to change.
Do you want to renovate a specific are of the home, like a kitchen or bathroom? Or perhaps you want to change multiple rooms at once, or even undertake a whole-house renovation.
In any case, the first step is always to determine the specific changes you want to make and ensure they align with your overall vision for your home.
Calculate a Preliminary Budget Range
Once you have a clear scope of work, you can start requesting contractor estimates for the costs of the renovation. It’s best to talk with multiple contractors so you can find one who understands your vision and budgetary constraints for the project.
A good renovation estimate includes budget allocations for design work, materials, labor, permits, and a contingency for unexpected expenses. Based on the estimates you receive, you should be able to identify a realistic budget range to help you understand the financial commitment required for your project.
Consider Personal Finances
Assessing your personal finances is another important part of exploring a home renovation loan. You should determine how much cash you have on hand and how much you are willing to spend out of pocket. This will influence your decision on the type of construction loan to pursue and how much financing you will need.
Step 2: Meet with a Loan Officer
With a clear understanding of your project’s scope and budget range, the next step is to meet with a loan officer. Their job is to guide you through the financing options and help you choose the best loan for your needs.
Initial Consultation
During the initial consultation, the loan officer will review the current value of your home and discuss the potential post-renovation value. They will ask about your current finances, how much cash you have on hand and your willingness to spend out of pocket.
Evaluating if a Renovation Loan is Right For You
The loan officer will help you assess various loan options, including home equity loans, cash-out refinance, and renovation loans. Depending on your financial situation and project budget, a renovation loan may or may not be the best option for you.
Your loan officer will help you evaluate each option based on your budget and project needs, guiding you toward the most suitable choice. If you choose to move forward with a renovation loan, your mortgage company will help to manage the project to ensure that it meets certain valuation and quality standards.
Step 3: Prepare and Submit Renovation Plans
With a loan officer on board, the next step is to finalize the details of your renovation project. This step requires hiring a contractor and working closely with your team to develop detailed plans and specifications.
Select Your Contractor
If you haven’t already done it, you’ll need to officially hire a contractor to help you create accurate and detailed plans for the renovation. This includes finalizing the scope of work, selecting materials, and determining the timeline for the project. Having detailed plans ensures that the project stays on track and within budget.
In cases where your project’s financing is directly tied to its completed value, it’s best to hire a contractor who offers a full suite of design services. Fully designing a renovation before beginning the work helps to maximize the completed value of your project and avoid unnecessary or unforeseen expenses during construction.
Submit Plans to the Loan Officer
Once the plans are complete, submit them to your loan officer. The mortgage company will need these documents to understand the scope of work and the associated costs. Different mortgage companies have different requirements for what should be included in the design plans. You’ll need to communicate these requirements with your contractor to avoid any delays in the loan process.
Step 4: Obtain an Appraisal
After you’ve submitted your plans to the mortgage company, obtaining an accurate appraisal of the project’s value is the next step in securing your renovation loan. The appraisal helps determine the post-renovation value of your home, which will influence the value of your remodel.
The Appraisal Process
The appraiser will visit your home and review the renovation plans to assess the after-improved value. They will compare your home to similar properties in the area and consider the additional value of the planned improvements to determine its post-renovation value.
Using the Appraisal to Finalize the Loan
The appraisal results will impact your loan terms. If the appraisal falls within the acceptable value range for the loan amount required to fund the project, you can move forward with finalizing your loan. Your loan officer will use the appraisal amount to determine the maximum loan amount and interest rates.
If the appraisal amount comes in lower than expected, there’s a chance the loan amount will not fully cover the total cost of renovations. In this case, you will need to determine whether or not you can find an alternative source of funding for the remaining amount.
Step 5: Finalize the Loan and Begin Renovation
With the appraisal complete and approved, you can now finalize your loan and start the renovation process.
Paying Off Existing Mortgages or Liens
If you have any existing mortgages or liens on your property, the loan will first pay these off. This process rolls everything into the renovation loan, consolidating your debt into a single payment.
Setting Up the Draw Account
The draw account allows your contractor to access funds as needed throughout the renovation. The contractor will request funds from the account based on the percentage of work completed. This ensures that funds are available when needed and helps keep the project on track.
Monitoring the Renovation
Your mortgage company will likely schedule several inspections and site visits throughout the renovation process. These inspections ensure that the work is progressing as planned and meets the required quality and valuation standards. Keeping track of the project’s progress and budget helps avoid delays and cost overruns.
Step 6: Completing the Renovation and Closing the Loan
Once the renovation is complete, it’s important to understand how your renovation construction loan will transition.
Final Inspections and Approvals
Final inspections ensure that all work is completed to satisfaction. The inspector will verify that the project meets all requirements and that the project design plans have been fully completed.
Transitioning to a Permanent Loan
Depending on your loan terms, the renovation loan may transition into a permanent loan, such as a fixed-rate mortgage. Some renovation loans automatically convert into a conventional mortgage upon completion. However, if you opted for a two-time close loan, you might need to refinance your renovation loan once the work is complete.
Enjoy Your Newly Remodeled Home
With the renovations completed and your loan transitioned into a conventional mortgage, you now have nothing left to do except appreciate the upgraded comfort of your home. Congratulations, you’ve earned it!
Curious About Other Home Remodel Financing Options?
Now that you’ve read about the process for obtaining a renovation construction loan, do you have a better idea of whether this type of loan is right for your remodel? If you’re still considering your funding options, continue your research by downloading our free Remodel Funding Guide. In it, you’ll find expert advice and industry best practices compiled by our remodeling experts at Lamont Bros.
Considering a remodel? If you’re looking for a contractor to help you design and build a space custom fit to your needs, click the button below to schedule a free design consultation with a member of our team. We’ll help you navigate the challenges of home remodeling so you can confidently renovate your home to better fit your needs.