Video Transcript:
Planning a home renovation but unsure about financing it? Don’t worry, you’re not alone. Stick around and we’ll answer all your questions about renovation loans. Hi, I’m Vanessa, a loan officer here in the Portland metro area. If you desire to remodel your home but are feeling overwhelmed by the financial side of things, you’re in the right place. Today, we’ll walk through renovation loans, the cost, benefits, and misconceptions.
What Is a Renovation Loan?
What exactly is a renovation loan? Renovation loan is a loan that allows you to use the after-improve value to determine the loan to value. Before the loan funds, the lender orders an appraisal which will be based on the scope of work that will be done. We use the after-improve value to determine the loan to value. There are several types of renovation loans that are available.
There is an FHA 203k loan that has a maximum loan amount of $672,000 in Clackamas County. Only requires three and a half percent down, should the loan be a purchase. A home style renovation loan that has a maximum loan amount of $766,000, which is the conforming loan amount, only requires 5% down, if the loan ends up being a purchase. Once we go over those limits, we’re looking at non-conforming loan sizes. There’s no maximum loan size when it’s non-conforming. However, the loan to value is capped at about 90%.
What Are the Eligibility Requirements for a Renovation Loan?
On a non-conforming renovation loan, which would be a jumbo loan with a loan size over $766,000. The credit score should be over 700. If credit scores are a challenge, the FHA 203k will go down to about 620 and the home style renovation loan will go down to about 660. However, those programs do have loan size caps.
Also, if a borrower has a recent bankruptcy, the FHA loan has a very short seasoning requirement. There really is a loan program for just about every borrower, even for borrowers who have unique or challenged financial scenarios. Talking to a lender before starting down the path of renovation planning is very important.
What Are the Costs and Benefits of a Renovation Loan?
The interest rate for a renovation loan is only about 0.5% higher than a non-renovation loan. The closing costs can usually be rolled into the loan, if we are doing a refinance. On a purchase, the seller can cover closing cost as well. If you were to compare the fees of a non-renovation loan, a traditional loan to a renovation loan, you’d see that the renovation loan results in the appraisal saving about $100 higher.
There are draw fees that range from $900 to $1600. Title fees will increase by about $500. So all the closing costs will increase by about $2,200 for a renovation loan. The renovation loan is the only loan that lets you tap into the after improved value. Renovation loans can be paid off quickly and they can be refinanced at any time with no prepayment penalty. A renovation loan allows you to do renovations now instead of waiting to do them later.
What Are the Common Misconceptions About Renovation Loans?
One of the common misconceptions is that renovation loans are hard to do. Renovation financing can be easy if you have the right team. The team being the contractor, the lender, and a realtor, if this is a purchase. Renovation loans are really expensive and you have to bring a lot of money to closing. And that’s not true. It’s not necessary to bring 20% for a renovation purchase or a refinance.
A common misconception is also that it takes a very long time for a renovation loan to close. If using a renovation loan on a purchase, the loan can close between 45 to 60 days if the team works together.
How Do I Choose the Right Renovation Loan?
Work with your lender to determine a monthly payment that will fit your financial goals. A lender can help you work those numbers so that you know the maximum amount of renovations that could be done to keep within your comfort zone. Just about every lender can offer a renovation loan. However, that does not mean that they fully understand the program well enough to provide you with the information needed to make a good decision.
When interviewing lenders, ask them How many renovation loans have you done personally? How many have you closed within the last two years. If they hesitate. Or if they say, someone else in my branch has done a bunch, That may be a clue that they don’t have enough experience.
Should I Do a Remodel Now?
Now that you have a better understanding of renovation loans. Are you worried if you should do a remodel now with interest rates so high? Check out this video that will walk you through high interest rates using the latest data to give you a clearer financial perspective. Continue to inform yourself and make sure to subscribe to this channel for more educational content from the experts on home remodeling.