If you are a homeowner who wants to renovate your home, you don’t have to wait until you’ve saved up the tens of thousands of dollars it may take. Since it’s now harder to take out a second mortgage, there are loan programs in place to help you. These programs have cropped up from popular demand; the Federal Housing Administration insured six times as many home renovation mortgages in 2010 than they had in 2007, and the volume has continued to go up. But before you apply for any of these loans, you need to get organized.
First, determine what kind of loan you need.
A few of your choices are:
Fannie May HomeStyle Loan: If you have good credit, this loan will allow you to borrow up to 95% for the mortgage and remodeling work together. Your location and local real estate values will determine the loan limits. This is a good fit for home investors, as opposed to owner-occupants.
Construction Loan: If your house needs work done, you can add the cost of those upgrades to your mortgage. Lenders are happy to loan money for increasing a home’s value or even building a new house, but don’t like to loan money to people who are trying to flip a house.
Federal Housing Administration’s 203(k) plan: You would hire a consultant, who would inspect the construction plan. If you are given the go-ahead and financed for the project, you would have six months to complete it. This loan does not demand as high of a credit score, and you can get your down payment as low as 3.5%, although it is only available for owner-occupants.
A loan from a mortgage broker: With a mortgage broker, you can choose from over 200 different loan programs. A mortgage broker can put together a loan that works for you, even if you don’t have the best credit history.
Make sure the loan covers what you want fixed.
Some loans won’t cover what they view as “luxury items.” This means if you want to add a spa or a swimming pool, you might be on your own. The Federal Housing Administration’s 203(k) rehab loan is one such loan, but a Fannie Mae HomeStyle loan would cover you.
Know how much money you need.
Every project begins with an estimate, which is good because lenders will want specific numbers. However, you can’t just go in and tell them, “My contractor says it will take $60,000.” With your contractor, make a list of the cost expected: permit fees, labor, materials, quantity and price, and the grand total. Then, throw in an extra 10% thrown in for any nasty surprises that may crop up during the remodeling process.
Even when you write it all out, you are not guaranteed anything from the lender. How much money you will receive and how much interest there is will be influenced by your credit rating – as well as your income and the loan-to-value ratio. Based on that, the lender will determine the length and interest on the loan. If you want the best deal, make sure you haven’t maxed out any credit cards this year or had any recent regular late payments. You don’t have to have a perfect credit history, just one that generally illustrates your fiscal responsibility.
Look to your future.
If you are planning to refinance, or sell the house in a few years, the loan may complicate things. The money you have tied up in loans will be a hit on your profit when you sell the house. And refinancing could get tricky, as your lender will need to sign off on it and could use that as leverage if you’re already in default on your loan.