Financing Your Fixer-Upper

Kelly Tribell By Kelly Tribell

Whether someone is looking to purchase a home that needs renovations or is looking to renovate a home they currently own, there are two financing options available. Deciding which type of financing is best for a certain situation will depend on several factors. Understanding the different options will help home owners and buyers make the best decision for financing their fixer-uppers.

New Purchase

When a home buyer wants to make modifications to a home they are purchasing, they need to first decide how extensive these changes will be. The type of financing available will depend upon factors such as how much the renovation will cost and if it’s a complete renovation or just minor improvements. These factors become important in the following ways:

  • Conventional loan- Conventional loans provide many options for home modification. With a conventional loan, fifty percent of the “as-is” value of the home can be borrowed for renovations. This amount is in addition to the purchase price of the home. Conventional loans are also available for secondary residences and investment properties. This characteristic provides a great option for those who are looking to purchase a vacation home or rental property in need of repair.
  • FHA loan- FHA loans are more limiting than conventional loans when it comes to home renovation. In order to qualify for this type of loan, the home must be the borrower’s primary residence and must be in financeable condition. This means that unlike conventional loans, FHA loans are geared more for minor home improvements rather than full remodels. FHA loans are also limiting in the amount of money that can be borrowed. These loans have a $35,000 cap for improvements regardless of the value of the property. These loans are also subject to a 90-day renovation program, meaning improvements must be started within 30 days of purchase and completed within 90 days.

Owned home

If a home owner is looking to refinance their home and include funding for renovations, they will need to determine the extent of the desired changes. Knowing the regulations for conventional and FHA loans will help the home owner make a more educated decision on their refinancing options.

  • Conventional loan- If a home owner wants to make a major renovation, or completely remodel a home, the conventional loan option will be the best choice. When refinancing with a conventional loan, the amount available for renovation costs is ninety-five percent of the “to-be-completed” renovation value minus the current principle balance. For example, if a borrower owes $100,000 on a property that, once the planned renovations are made, will have an appraised value of $200,000, the amount of money available to cover renovation costs will be $90,000.
  • FHA loan- If a home owner will be making improvements to an existing residence such as energy efficient windows or a new heating unit, a FHA loan may be the best option. As stated above, FHA loans are only available for primary residences in financeable condition. With the $35,000 cap on renovations, this loan is best suited for minor improvements rather than major renovations.

Prior to making any home improvement plans or decisions, it is always a good idea to explore the available financing options. Once a loan option is determined, creating a feasible renovation plan will be easier. It is also important to note that with either a conventional or FHA loan, all improvements and renovations must be done under the work of a licensed contractor. Having the help of a knowledgeable loan officer is crucial for determining which financing option is the best fit for the renovation. For more information about these loan options, contact Kelly Tribell at Simply Home Lending, Inc.