If you’re thinking about financing a home remodel, one option to consider is a renovation construction loan. Here’s a look at what it is and a step-by-step guide on how you can get approved for one.
What is a renovation construction loan?
A renovation construction loan generally allows you to access more funds than you could via something like a traditional home refinance, because it lets you borrow against the value of your home after the renovations are complete. It’s a good option for those looking to take advantage of the extra equity in their home that the remodel will result in. This assumes the remodel will add a significant amount of value to the home.
Once construction is done, typically you have the opportunity to convert the loan into a 15 or 30-year mortgage. Now let’s take a look at how you can get approved for one.
Step 1: Prequalify with the bank
The first step in the renovation construction loan process is meeting with your banker and going over some details about your income, credit, and the home remodel project you have in mind. They’ll review the project from a high level standpoint and see if the loan amount you’re asking for aligns with the anticipated value of your home once the project is complete.
The focus at this point is primarily on your income and credit score to ensure that the bank can prequalify you. The lender isn’t going to be digging in to the project specifically or whether it’s doable. That will come a bit later on.
Step 2: Feasibility study
Next, you’ll generally move ahead with a feasibility study with the design/build firm that you choose. The objective of the feasibility study is to clarify the project, determine the budget that will meet your needs, and discover answers to questions the builder has about the structure or what type of renovations may or may not be allowed by your city.
This is the first point at which you’ll need to start investing some of your own money into the project. Typically, this involves a small retainer paid to your design/build firm. For us, that usually ranges between $1,000-$5,000 based on the type of project.
The feasibility study is done to ensure there are no major obstacles preventing the project from being completed. It also involves putting together all the documents the bank needs to evaluate the project from their perspective to help them determine what your home will be worth at the end of the remodel. These documents include:
- Interior and exterior renderings
- A preliminary selections and materials package
Step 3: Appraisal
The third step of the renovation construction loan process is to collect all of those documents, sign a preliminary construction contract, and send that over to the bank so they can order an appraisal. The appraiser will review the documents and visit the job site in order to provide a future value for your home if the construction is complete as planned out. That helps demonstrate the viability of the loan to the bank.
At this point, you’ll be responsible for another monetary commitment as you’ll need to pay for the appraisal. They fluctuate in cost but typically run a few hundred dollars. The bank will be able to give you a good estimate for what it will cost in your case.
Step 4: Engineering and architecture design phase
Next we move into the engineering and architectural design part of the process. At this point, we bring in the engineer to do the structural and architectural drawings and assess any engineering concerns. This also includes really detailing out the interior design of the project. The goal at this stage is to take your remodel from the concept drawings all the way to having everything detailed out. At the end of this step, you’ll end up with a fixed-price construction contract.
Once this phase is complete, your design/build firm will usually require
a design retainer. For us, that’s generally 2%-5% of the project cost.
Step 5: Permits and closing
Finally, your design/build firm will submit the detailed drawings to the proper local jurisdiction in order to get a building permit for your project. Your builder will go through the drawings with the permit officials, answer any projects questions they may have, and make required revisions to the drawings.
Once the building permit is approved, the loan can be closed, the bank can disperse the construction funds, and your builder can get started on your project.
At Lamont Bros., we have several years’ experience dealing with these types of loans and other common remodel financing tools. If you’re considering a home remodel and would like to review funding options, simply schedule a conversation with us.
Are you considering a home remodel but aren’t sure where to start? We’re happy to discuss your project and go over funding options with you. Simply schedule a conversation with us!
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