Homeowners can use a home renovation loan to obtain the required funds for repairs. Personal loans or mortgages with funds set aside for fixer-upper residences may be used for these rehabilitation loans. Depending on the type of loan you receive, you might need to show proof that the money was spent on your house or paid to a contractor.
How Do Loans for Home Renovations Operate?
Several loan choices are available if you’re buying a house that needs work. Depending on the type of financing you choose to apply for, a home remodeling loan may operate differently. The following programs are popular options for home improvement loans:
Fannie Mae HomeStyle®: The cost of house repairs is included in the entire loan amount of the Fannie Mae HomeStyle® loan, which is a single-close loan. This loan may be utilized to pay the costs of structural and aesthetic repairs and improvements the homeowner desires to make or that are required by an appraiser.
The simplicity of dealing with a single loan, a single monthly payment, and lower interest rates that include the purchase price and the cost of repairs, make this loan appealing to borrowers. You have the option of choosing an adjustable-rate mortgage with a duration of between 15 and 30 years.
Your ultimate loan amount with a HomeStyle® mortgage is determined by the anticipated value of the house following the completion of the repairs. The HomeStyle® loan from Fannie Mae is an appropriate option for a buyer with excellent credit.
FHA 203(k) Loan: Similar to HomeStyle®, the FHA 203(k) loan is backed by the government, but it is available to buyers with less favorable credit. This is typically the more expensive of the two options because FHA loans come with greater mortgage insurance rates for applicants who put down less money. With these mortgages, the initial cost is part of the overall loan balance. The kind of FHA 203(k) loan you require depends on the condition of your property. There are full and streamlined alternatives.
The Streamline Loan: This loan is used to pay for smaller repairs costing less than $35,000, whereas the FHA 203(k) Full Loan is designed for a principal house needing substantial repairs.
EZ “C”onventional: This type of loan can be used with traditional mortgages to finance non-structural home improvements that raise the property’s value. It covers renovations chosen by the borrower and those the appraiser needs.
Jumbo Renovation: Similar to the EZ “C”onventional, a jumbo renovation loan is utilized for more expensive homes not covered by regular home repair loans. Large renovation loans may be used for the borrower’s repairs or those that an appraiser deems necessary. Non-structural repairs that boost the value of the house are required.
USDA Rural Development Home Repair Loans: Through its Rural Development program, the USDA provides funding to assist homebuyers in securing safe, quality housing. This funding can be used to pay for new appliances, foundation work, roofing, siding, windows, plumbing, electrical upgrades, and other health and safety-related improvements. Rural location and income are the two criteria for program eligibility.
A home renovation loan may be one of many choices if you are unable to pay for your renovations out of pocket. A home equity loan or home equity line of credit (HELOC), typically less expensive than personal loans, is another option.
This is the best alternative if you have a certain amount of equity in your home but average credit. A home equity loan is a one-time payment with a fixed rate, whereas the HELOC has variable rates that change along with mortgage interest rates.
Alternatives to Borrowing Money to Improve Your Home
If you have excellent credit and a low-cost project in mind, a credit card with no interest periods is another choice for a full renovation loan. If you charge your project expenses to a distinct credit card, keeping them separate from other expenses will be easier, and the cost of borrowing funds will be reduced if there isn’t any interest charged. Just be aware that using a credit card can make it easy to overspend, so be careful how you use it and pay off the balance quickly.
You also have the choice of cash-out refinancing, which involves refinancing your existing mortgage at a higher loan amount and using the additional funds for upgrades. This choice may make sense if you have a high credit score, at least 20% equity in your home, and affordable interest rate options available.
Examine your home’s present interest rates, equity, and lenders carefully before opting to refinance. You may be better off with different options depending on your situation. The reduced interest rates and closing expenses of a home renovation loan make the most sense if you need to renovate your house immediately.
If your home already has some equity, you may qualify for a home equity loan to take advantage of a strong market and increase the value of your home. Credit lines and cash-out refinancing need to be carefully explored when interest rates are low and your credit is good.
Fairfax Mortgage Investments
If you have any questions regarding the renovation loan process and what option will be in your best interest, please don’t hesitate to contact our team of helpful professionals at Fairfax Mortgage Investments today for details, information, and timeline options.