By Jonathan Bodeen · 10 September 2018
A Quick Introduction into Home Renovation Purchase Loans
A problem that many buyers are having is the lack of upgraded homes in their price range. There just isn’t a lot out there right now! One of my clients experiencing this problem right now asked me the question; “Are there any mortgages out there that will let me wrap renovations into the project?”
The short answer is yes, yes there is! The caveat is it’s not nearly as simple as a normal mortgage. The bank granting the loan must approve all of the improvements and you better have contractors that are willing to work with the bank.
The total loan amount will be your purchase price, minus your down payment, plus the renovation costs. The big caveat is that the bank will have an appraiser estimate the future value of the home after the renovations are complete. The estimated future value has to be above your total loan amount, plus the down payment or the bank won’t lend.
This means a few things. First, the bank must approve each improvement to the home with the help of an appraiser. If it’s an improvement the appraiser believes won’t pay for itself and then some with the potential equity gain, they won’t loan on it. Things like new pools, solar systems, or a basketball court aren’t going to get approved by the lender because they are things that typically won’t add the same value to the home compared to the cost of putting them in. Think, new kitchens, flooring, paint etc.
Secondly, you want to get a good deal on the house you are buying in the first place. If it’s already priced at the top of the market, then pouring more money into it will not only be a poor investment for you, but also a poor collateral choice for the bank.
So when you are choosing the house to flip into your dream home, be picky about the things you can’t change, like location, lot size, basic floor plan, home orientation, and don’t worry about the cosmetics. Ignore paint, cabinets, smells and grime, because if it’s all going to be redone anyways, who cares? In fact, the dingier it looks at first glance, the better chance you have of really getting a low price on it, making your flip the best investment possible.
The other piece of this is to make sure you get the right lender. Plenty of lenders might be technically able to perform these loans, but if they don’t have a lot of experience closing them, it can lead to delays, problems, and disappointments. (Hint: We know the right lenders!)
It’s also very very important to find the right tradesmen. Not only must they hold the appropriate licenses and be insured etc. but you want to make sure these are folks whose estimates are accurate. Because if the cost of the improvement changes mid-project, that could effect the loan coast and theoretically kill the deal. Use folks with a good reputation! (Hint 2: We know the right contractors!)
It may surprise you that these types of loans are available as low as 3.5% to 5% depending on your eligibility. Want to know more? We can point you in the right direction.
Jonathan Bodeen