There are some options for you to consider to leverage someone else's money to fund your renovation:
1) HOMESTYLE LOAN - Fannie Mae has a HOMESTYLE LOAN that is available from Fannie Mae approved lenders. This loan could be an option if you have a credit score of at least 620 and the home you wish to remodel will serve as your primary residence. This loan requires a down payment of at least 5 percent of the full purchase price of the home. This loan can be used to purchase a home and fund improvements at the onset or it can be used to make improvements on an existing property already in the owners possession. To initiate this loan, you must hire a certified contractor to submit a cost estimate and details of the work to be done. An attractive aspect of a HOMESTYLE LOAN is that you don't need to take out two separate loans if you are wishing to purchase a home and renovate it right away. This reduces the hassle of mortgage paperwork times two and it also saves on closings costs since it is just one loan. If you are using this type of loan to purchase the property and fund the renovations, the renovation money is kept in a separate escrow account from the upfront property purchase. Funds from this escrow account are used to pay the contractor directly for the home improvements. The home owner does not have direct access to the funds like you would with a home equity line. The loan amount is based on the completed value not the current value.
2) 203(k) LOAN - The FHA (Federal Housing Administration also offers a loan for home renovations called a 203(k). This loan type generally has a lower credit threshold than the Homestyle Loan. The minimum downpayment for a 203(k) is 3.5%, which is also lower than the Homestyle Loan. With a 203(k) Loan, there are two different types. The limited FHA 203(k) loan is designated for cosmetic improvements with a $35,000 cap. The standard FHA 203(k) loan may be used for more extensive remodeling, but it does require you to hire a pre-qualified 203(k) consultant to serve as a project manager to oversee every step of the project starting with the planning and continuing through the final completion of the renovation project. With a 203(k) loan, the renovation funds sit in an escrow account with the lender. The loan amount is based on the completed value not the current value.
3) HOME EQUITY LOAN - A Home Equity Loan is known as a second mortgage. It is a one-time loan that has a fixed interest rate and constant payments during the payback period. This loan is secured with the lender to cover the cost of renovations and usually has a separate payment and terms from your primary mortgage. This loan uses the home as collateral for the loan.
4) HOME EQUITY LINE OF CREDIT - A Home Equity Line of Credit (HELOC) is a revolving line of credit that can be used over a period of time. The line of credit amount is determined up front but money may be borrowed against that credit line at different points of time. The HELOC can also be used for non-home renovation purposes (such as funding education). However, you need to be aware that recent tax changes only allow you to deduct interest from a HOMLOC if it is for costs directly associated with your home. With a HELOC, you are pledging your home as collateral for the loan to cover the lenders risk of non-payment.
5) CASH-OUT REFINANCE - A Cash-out refinance is also an option. In this scenario, you apply for a new mortgage that is a higher value than your current mortgage. That difference provides cash back to the owner that can be used for home improvements. Keep in mind that the home value must appraise enough to produce equity that is comparable to the refinance loan amount. In this type of loan the home is also used as collateral for the mortgage. Sometimes this is also an attractive option if current interest rates are less than that of the original loan. This likely will require at least 20% equity in your home to qualify for a cash-out refinancing. The total loan amount is limited to the available equity in your home. The credit score required for this type of loan may vary based on the amount of the loan and the value of the home, but you might expect to see it at about 640 or higher.
Before you pursue any type of option to use for home improvements, it is always smart to consult with an appraiser and real estate agent to ensure that the improvements you are making are evaluated for ROI based on the community, address, location, etc.
If you are looking for a renovation project, feel free to give me a call at 239-287-2576 and I am happy to help you located and secure one that meets your needs.
NAPLES REAL ESTATE BLOG
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