Misconceptions about Renovation Loans
Educate yourself on Renovation Loans
Renovation loans can help home buyers roll remodeling costs into the loan. These renovation loans allow the buyer to update the home to their preferences, and reduce the amount of cash needed from their pocket when buying a home that needs fix-up.
Before you consider buying a fixer upper or outdated home and are thinking of getting a renovation loan you need to understand the complexity.
Buying a home with a renovation loan is a tedious process which requires greater buyer commitment than getting a regular traditional loan.
Understanding the following misconceptions will lead you to a successful closing when doing renovation loans.
Are you short on cash?
Renovation loans can be difficult if the home buying budget is limited. Most home buyers think that renovation loans will cover all their renovation costs and no additional cash is needed. Not so. Home buyers need to make the allocated renovation dollars fit into the appraisal and still be under the loan amount you qualify for.
If not, then the difference has to be paid in cash. These limitations can make it difficult to get all the desired renovations and still have the property appraise for the value needed.
Will the property value be enough?
The home renovations must add value to the property, but not all buyers desired renovations do. Purchase price + Renovations = Appraisal amount. The extent of value is based on the size of home and market values that the neighborhood brings.
Appraisers seldom give extra value to a home that has been over improved.
If you over improve the home by adding a high end kitchen or selecting the most expensive floors, and you buy in an average neighborhood, the appraiser may not give you high end value for the improvements. So if you are not willing to do renovations comparable to the value level of the neighborhood, there could be a short appraisal. You can still get your dream kitchen, but you may have to pay the difference between the appraised value and actual renovation cost out of pocket.
If you did not want to pay out of pocket, you may have to adjust your expectations and select a budget friendly kitchen instead.
How much can you renovate?
You may be limited with the amount you can renovate based on renovation loans limitation and the appraised value. The appraisal is based on the completed renovations. The difference between purchase price and appraised value after renovations are completed is the amount you can spend.
For example, if property is purchased for $180,000 and market value is $250,000, then you have $70,000 to spend on renovations. However, the amount may not be enough to cover everything, so some items may not get renovated.
Unexpected renovation loans cost
Using the above example, the $70,000 renovation amount needs to include any contingency reserve costs plus some loan costs.
The renovation costs are the costs determined to renovate the home which includes the contractor charge of 18-25% for their services.
The contingency reserve is 10-20% of renovation amount depending on loan type and available utilities. This is set aside for unforeseen repairs that may be discovered during the actual renovation.
For example, if the contractor charges 25% and the loan contingency is 15%, that means that 40% of the budget is going toward administration. That leaves only $28,000 toward actual renovations. You need to factor these administrative costs to determine how much money you actually have to renovate.
What the contractor handles
Buyers need to know exactly what they want done to the property. Contractors are not designers. Contractors will price out the amenities that you want, but you need to know what you want before they can give you a final price on the renovations. The contractors will have vendors for cabinet, colors, flooring to select from and can give you cost allowances based of products you want.
It is up to the buyer to pre-select or have an idea of what type of flooring, appliances, cabinets, counter tops, windows, ac unit, hardware etc. is desired for the renovation.
Many decisions early
If you wait to decide what to renovate, you could jeopardize the loan process. If you know what you want in the home before the contractor provides an estimate, it will go so much quicker. You do not have a lot of time to decide on items because the appraisal cannot be done until contractors agreement is finalized.
Do your homework early of what you want renovated so you do not slow done the loan process and miss your deadlines.
Life during renovations
Let’s be realistic. You cannot move in until you have full access utilities, bath and kitchen. If you renovate an entire new kitchen or bath, or utilities need to be repaired, there will be a period of time where it will be very difficult to live in the property. You may have to wait a few months before you can actually move in. You have to factor where you may be living and paying rent or mortgage for 2 properties before you can move into your new home.
Depending if there is enough room on the appraisal, you may be able to roll a few mortgage payments into your loan for the months the property is not occupied.
It’s not a quick process…
This is a very involved process, and slow decisions could cause long delays. To be on the safe side, your closings should be 60 days from contract acceptance when doing renovation loans.
Is any contractor qualified to do the work?
Not every contractor can take on this project. They have to be financially stable because the contractor has to wait to be paid draws from the bank. Not all contractors and subcontractors can wait for their pay check. The contractor has to be administratively organized. The contractor has to file paper work timely and detailed to the lender for these renovation loans.
Regardless of the type of loan you are doing, Buyers Broker of Florida will help educate you on the loan process so that you can close on your dream home. As always, there is no charge for consultation or to learning about your home buying opportunities. Call us 407-539-1053