Have you found the home of your dreams, but aspects of it are in disrepair or outdated?
Maybe you are already the owner of a home you love, but the kitchen or bathrooms are in need of an upgrade, the roof needs replacing, driveway needs repair… there are countless things in a home that might need renovating at any given time. Fortunately, whatever your reasons for wanting to renovate, there are mortgages that can help with the cost. With any renovation loan, you are mortgaging two items: firstly, the house you are renovating; secondly, the costs of renovations.
Option 1: FHA 203k loan
The FHA 203K loan, sometimes called a rehab loan or an FHA Construction loan, is a type of renovation loan offered by the Federal Housing Administration. Like other FHA loans, there is typically a lower credit score approval and lower down payment requirement for this kind of loan. It also requires mortgage insurance. There are two kinds of FHA 203k mortgages: standard and streamlined.
FHA Standard 203k
A standard FHA 203k allows you to do anything you want to the home, including structural changes, with the exception of temporary changes or adding luxury amenities. While you could, for example, use the loan to improve handicap accessibility to your home, you could not use the loan to add a pool to the backyard. There is also a limit on how long it can take to complete the work; all repairs or renovations must be completed within six months.
FHA Streamline 203k
As the name suggests, this type of 203K loan comes with a few more restrictions. The approved repairs are usually pretty minor, and the amount financed for repairs is capped at $35,000, which includes the required contingency fund of 15% in case you go over-budget on repairs. Streamline 203k loans can be used for things like roof replacements, painting, or putting in new flooring; they cannot be used for luxury items or for structural renovations.
Option 2: Fannie Mae Homestyle Loan
A Fannie Mae Homestyle loan is a popular choice for renovation loans. Like with FHA 203K loans, you can either use a Fannie Mae Homestyle Loan to purchase or refinance your home with the renovation costs rolled into the mortgage. This loan does come with a few caveats: any proposed work must have an estimate, also known as a bid, submitted by a certified contractor, and the money for repairs is held in an escrow account. The credit score minimum and down payment percentage are also slightly higher than with an FHA 203k loan.
Option 3: Home Equity Loan
The Home Equity Loan is a type of refinance loan, also called a second mortgage. This type of loan is useful if your renovations require a large sum to be paid upfront. Lenders do, however, require a certain amount of equity to already be established before they will lend for a home equity loan.
Option 4: Home Equity Line of Credit
Similar to a home equity loan, a Home Equity Line of Credit (HELOC) is a refinance loan that requires a predetermined amount of equity to be established on a property before the loan can be taken out. Unlike the home equity loan, a HELOC is a somewhat more flexible option, usually with a variable interest rate, with interest paid based off when and how much you take out. This type of loan is best if you have large or staggered home improvement costs that are paid over time.
Option 5: Cash Out Refinance
Like with home equity loans and with HELOCs, a Cash-Out Refinance loan requires you to put your home up as collateral for the mortgage. The refinance amount will be slightly higher than your original mortgage, and the difference between the amounts is given to the borrower in cash. It does come with stricter requirements than either home equity loans or HELOCs. The minimum credit score is higher, and there is a 20% minimum equity that needs to already be in your home before refinancing.
Option 6: STM Simple Escrow
While a standard agency escrow only permits the postponements of weather-related repairs such as the pouring of a driveway or laying of sod and seed, this program allows you to make cosmetic improvements to the purchase or refinance of an existing home. The STM Simple Escrow is perfect for homes in established neighborhoods with outdated kitchens, bathrooms, HVAC or a roof. The repair costs are the lesser of 15% or $50,000 of the “as completed” value of the home. This program requires less paperwork, has a shorter completion of repair window and is just as the name conveys SIMPLE. Think of this as a streamlined version of a Renovation loan. Repairs are cosmetic in nature, therefore no structural work to the home including the foundation can be made. STM handles the draws so you can rest assured the Contractor will be paid in a timely manner upon the completion of work.
With all these options, how do you choose which is best for you?
Given the various types of loans for renovating and the different purposes they serve, you’ll want to be certain that the loan you choose is the one that’s right for you. The best way to do that is by speaking with one of our experts here at Southern Trust. Our team of mortgage experts are ready to help you finance your renovations, no matter how big or small they may be. Contact us today to Make Home Happen.