Lender Questions

Lender Questions

1. WHAT IS A RENOVATION LOAN

 
A renovation is a loan wherein a potential home purchaser or a home seller can integrate funds from a mortgage into one payment. This one payment will allow for improvements to be done on a home. Improvements could be anything from minor, cosmetic, or significant repairs. Renovation loans come in several different lending programs. The programs can be an FHA 203K; a conventional loan referred to as Fannie Mae and or VA. There are two types of FHA renovation loans. The first type is known as an FHA 203K streamline renovation. A streamlined renovation has a maximum amount of $35,000 that can be used for typically minor and or cosmetic upgrades. These upgrades are not and cannot be anything structural in nature. It is commonplace for a streamlined loan to be used for such things as a new roof, exterior painting, interior painting, and finished floor products. These types of items could be within the $35,000 threshold. It should be noted that a streamline could revert to a full renovation project, regardless of the amount of money, if, during the appraisal and inspection process, structural damage such as dry rot or conducive conditions that can lead to structural damage is discovered. The second renovation program is the complete renovation. It is designed for minimal improvements and upgrades or can be used for significant improvements to a property. These improvements normally exceed the $35,000 of the streamlined loan. Although, even if you think you are doing a streamline under $35,000 and structural damage is discovered, the loan will automatically be a full renovation. A full renovation can be upwards into hundreds of thousands of dollars. Depending upon the loan qualifications and the loan amount limits per the county in which you may be purchasing a property, a complete renovation can be used for various improvements whether they want to and or have to items.
 

2. WHAT TYPES OF RENOVATION LOANS ARE THERE, AND WHAT ARE THE FINANCING OPTIONS

 
There are several types of renovation loans. Primarily the three lending sources for a renovation loan would be an FHA, conventional, which is currently known as FNMA (Fannie Mae), and or VA. All these loans are structured the same way except for the down payment on purchasing a home and the credit scores of the individual applying for the loan. It should be known that all three organizations would typically require mortgage insurance (VA could be an exception check with your Lender) if the home’s loan value were less than 80%. The most common renovation loan is known as the FHA 203K loan. FHA typically will have higher loan-to-value ratios for a purchaser, and the credit scores do not have to be extremely high, although a person still will have to qualify based on their income and debts.
 

3. CAN ANY LENDER DO RENOVATION LOANS

 
Not all lenders do renovation loans. When talking to a potential lender, a person should ask several questions if they advertise doing renovation loans. The questions should encompass how many renovation loans does your company do? Is your company National or local? Does your company have a renovation concierge person? And is the loan officer experienced in renovation paperwork? How many renovation loans have the Loan officer personally done? Another question that should be asked is whether the lender retains the mortgage or sell your mortgage to a secondary company.
 

4. CAN RENOVATION REAL ESTATE RECOMMEND A LENDER

 
The simple answer is yes, we can. We have been in the inspection and mortgage business for over 30 years and have had experiences with multiple lenders across the nation. We are very familiar with all lenders specializing in renovation loan programs. Over the years, we have looked for a mortgage company with a dedicated service branch just for renovation loans, and the personnel that works in these areas have the knowledge and expertise to help you.
 

5. DO RENOVATION LOANS COST MORE

 
Overall, renovation loans do not cost a consumer more. However, there are a few nuances with the program wherein additional upfront monies could be spent to initiate the renovation loan. Over the years and with our experience, we have seen that there could be a slight interest rate increase of approximately an eighth to 1/4 of a point. Although there may be a minimal interest rate fee, the benefits will far outweigh this upfront cost. The objective for a buyer is to have these repairs done to the home so that it is the home of your dreams. Typically, a renovation loan after improved value appraisal will be significantly higher than if you were to have not done the renovation program. Think for a moment, even if there was a slight upcharge in the interest rate, what would be your cost if you were to pull the funds off your credit cards and out of your savings? With an increased appraised value in the property after one year of living in the home (referred to as seasoning), you can refinance your mortgage to hopefully a lesser interest rate and still have a large amount of equity in your home. See the breakdown chart.
 

6. ARE RENOVATION LOANS SAFE

 
Renovation loans are very secure. The safety net of a renovation loan program is that your mortgage company, through its renovation department, holds all the funds necessary for the renovation. These funds are only released to a contractor if the HUD-certified consultant has inspected the property and the quality of the work to ensure it meets all the required municipality and state regulations as they may apply. We have all heard of situations where a contractor has duped a homeowner into providing them a large percentage of the funds for a construction project only to have the general contractor not show up and or not do the job as specified. With a renovation loan, your consultant and your lender provide the safety net for your funds.
 

7. DOES A RENOVATION LOAN HAVE MORTGAGE INSURANCE (MI)

 
Typically, a renovation loan will have mortgage insurance. To explain mortgage insurance, a person needs to understand loan to value. Simply put, a home must have 20% or more equity to the balance owed. Think of it this way, if you had a $100,000 loan on a home and you had $20,000 in equity and still owed $80,000 on that home, that would be an 80/20 loan-to-value ratio. That is what we are looking for in mortgage insurance for a home. The benefit of a renovation loan program is that before the loan closing, the appraisal will be done based on the consultant’s work write-up of all the improvements that are going to be done to the property, work has not even begun, and the appraiser makes what's referred to as the after improved value appraisal. This appraisal establishes your loan to value. There have been countless times we're a property even before work has begun been deemed to have greater than an 80/20 value. You could exceed the 80/20 value in your first year, refinance your home, and remove your mortgage insurance.
 

8. DO RENOVATION LOANS HAVE A MAXIMUM LIMIT?

 
Renovation loans have a maximum limit that you can borrow. However, because there are several types of renovation loans, from FHA to conventional to even VA renovation loans, every entity has its loan limits. Your lender will advise you on the loan limits of geographic areas.
 

9. IS IT TRUE THAT ONLY LOW-INCOME HOUSEHOLDS OR PERSONS QUALIFY FOR FHA/HUD

 
This has been a common misconception of an FHA loan. FHA loans are not just for low-income persons or households; there is no prediction on the amount of money an individual or a family earns. The benefit of an FHA loan is that it typically has a lesser down payment on the property you were buying. Anyone in any income bracket can qualify for an FHA loan. Many people prefer FHA loans due to the minimum down payment required.
 

10. WHAT IS THE MINIMUM AMOUNT THAT CAN BE PUT IN A RENOVATION LOAN

 
The minimum amount that can be used for a renovation loan program is $5000. Even though $5000 is the minimum amount that can be put into a renovation loan, most people prefer to do multiple repairs or upgrades to the property that they're purchasing, thereby taking advantage of a low-interest rate on their mortgage and having all the improvements, upgrades done on the purchase. Think of it this way, why not have all the improvements and upgrades you want for your home to be done in a timely fashion, never to have to do them again? We encourage people to consider what they would be comfortable with for their monthly mortgage payment and then determine the amount of renovation money they could use for the upgrades and improvements to their new home. Simply put, take advantage of a low-interest rate Mortgage, and have all the improvements and upgrades.
 

11. CAN AN FHA LOAN BE USED TO RENOVATE A MANUFACTURED HOME?

 
A renovation loan can be used on a manufactured home; typically, the manufacturing date must be 1976 to the present day. This requirement may vary from 1976 to now, although a person should verify that with their mortgage company. When using a renovation loan on a manufactured home, there are requirements for the manufactured home by State and municipality codes. Whether it is a manufactured home or a traditional stick-built home, all the same, “Have-To” work items and “Want-To”-upgrade things can be accomplished.
 

12. CAN A RENOVATION LOAN BE USED FOR MULTI-FAMILY

 
A renovation loan can be used for multi-family properties. A multi-family property is identified as 1 to 4 units sharing the same envelope, such as a duplex, triplex, or fourplex. So, a renovation loan can be used to renovate a duplex, a triplex, or a fourplex. The first $5000 of the renovation needs to go to the unit the purchaser will be occupying. So, if you as an individual were purchasing a fourplex, you would have to live in one of the four units and could rent out the other three units. If the other three units needed work, including a renovation, those upgrades or improvements in the other three units could yield a higher rental income. When the appraiser appraises the other units in combination with the primary unit and sees that it is a renovation loan and the other units will be upgraded, the rental income is likely higher by upgrading the other units. To help you qualify for the loan, the lender will use a 75% rental income credit to enable an individual to purchase the duplex, triplex, or fourplex. A person can buy a duplex, a triplex, or a fourplex as easily as a single-family residence; all this is based on financial qualifications. If a person were looking to become an investor purchasing a duplex, a triplex, or a fourplex would be an excellent opportunity to be an investor.
 

13. CAN INVESTORS USE AN FHA RENOVATION LOAN

 
A renovation loan cannot be used by an investor. When the renovation loan program started decades ago, there was a provision for investors, although that has been eliminated. Although if a person were to buy a duplex, a triplex, or a fourplex, in theory, they would be investors. The person must still live in one of the units for a minimum of one year and financially qualify.
 

14. CAN A RENOVATION LOAN BE USED FOR A REFINANCE

 
A renovation loan can be used to refinance a house and make improvements and upgrades. When a renovation loan is used for a refinance, the lender may require an inspection of the property by a HUD consultant to determine any unforeseen conditions and “Have-To” items that would need to be done to the property outside of what a borrower may want to do. The consultant will do the specification of repairs and work write-up, and the Specification of Repairs (SOR) would include any “Have-To” items and the addition of the “Want-To” things that a person was doing to the home. A renovation refinances typically goes very smoothly, although the lender will still require the homeowner to provide documentation of their assets and liabilities to determine the amount of money the homeowner could borrow. The benefit of a refinanced renovation is that there is only one payment based on your home's interest rate. You would not have a second mortgage and or would not have to take money from credit cards or savings to perform the renovation on your home. The same type of appraisal, the after-improved value appraisal, would be used to determine the home’s value again before any work was conducted.
 

15. HOW LONG DOES THE RENOVATION LOAN PROCESS TAKE

 
A renovation loan typically does not take any longer to close than a standard purchase loan. Although because of other requirements needed for a renovation loan, such as acquiring the consultant and or, in combination, a general contractor to look at the property and provide estimates for the work to be done, it is advisable to consider asking your lender for potentially 10 to 15 additional business days extra to close your loan. If a person makes an offer to purchase a property, we recommend having a 45-day closing.
 

16. IS THERE A PARTICULAR TYPE OF APPRAISAL FOR A RENOVATION LOAN

 
The appraisal process for a renovation loan is not the same as for a standard purchase loan. The appraiser is provided with the consultant’s Specification of Repairs (SOR), indicating all required repairs and the “Want-To” items a purchaser desires for the property they are purchasing. The appraiser considers the property’s current value and, with the upgrades and improvements, determines the property’s value before any work is conducted. This appraisal is known as the after-improved value appraisal. The benefit of an after-improved value appraisal is that it gives the purchaser of the property an excellent understanding of what the value of the property will be, and work has not commenced. By having this information, the borrower can potentially refinance the loan after a one-year seasoning and typically eliminate the mortgage insurance.
 

17. WHAT IF I HAVE A LOW APPRAISAL

 
The answer to this question is somewhat complex. However, if under a standard purchase of a property, the appraisal does not come in at the value you were seeking, meaning it is not worth the purchase price, several options could happen. One of the options is that you, as the purchaser, would have to put up more money so that the house’s appraisal value would be met. Another option is that the seller would have to reduce the property price enough to match the appraised value. Although under an FHA renovation loan, there is an unknown statement that most people are unaware of. It is referred to as a 110% after improved value. What does this mean? For example, if you were purchasing a home for $400,000 and using $100,000 in renovation money, you would have what is referred to as a $500,000 total acquisition. The total acquisition is the purchase price plus the amount of the renovation. Let’s say that the appraisal only came in at $480,000, which in theory, means you are $20,000 short of what you need for the total acquisition of $500,000. If you were to take $500,000 and multiply that by 110%, it would equal $50,000. The $50,000 is what FHA could input on top of the $480,000, equaling a $500,000 total acquisition. Although only $20,000 of that $50,000 would be used so that you meet the appraised value and acquisition cost. Most people have never even heard of 110% of after-improved value. This slight unknown nuance is a significant detail if an appraisal falls short. The benefit for the seller is that they don't have to reduce the price of the house and the benefit for the borrower is that you have $20,000 more in equity. FHA uses this nuance because they are confident that after the improvements are made and with the increased value of a home over the years, they are still in a perfect position to lend you the money. If the 110% of after-improved value were to be used, the purchaser would, in essence, have mortgage insurance, and the value of the property might not equal or exceed an 80/20 loan to value within the first year. It might take several years for that home to have an 80/20 loan to value, allowing you to refinance and remove your mortgage insurance.
 

18. IS IT BETTER TO USE MY SAVINGS FOR A RENOVATION

 
It is not better to use your savings and credit cards to do a renovation. Think for a moment, your loan typically has a very low-interest rate, and the money for the renovation is in your loan. If you were to pull money off of a credit card, let's say 19%, that is a high cost compared to your mortgage interest rate. Using your savings or credit cards, you do not get an annual tax deduction, nor do you know what your after-improved value loan appraisal would be on your property. Additionally, you could run out of savings, and your credit score could be impacted by using a credit card, reducing your borrowing power and credit score. We strongly discourage using your savings and credit cards to improve the home.
 

19. CAN I DO A RENOVATION LOAN BEFORE I SELL MY HOUSE

 
A renovation loan can be used before you sell your home, although that might not be the most advantageous financial position you would want to be in. Depending upon the time frame in which you want to sell your home would be one of the factors of whether or not you wish to use a renovation loan for improvements to your property before selling. For example, suppose you were considering remodeling your kitchen, bathrooms, and interior of the property and were only going to be in the property for less than a year, not enjoying the improvements you made. In that case, this may not be worth the investment. There are programs available to make upgrades to a property where the fee and cost of those upgrades could be paid at closing. It would be advisable to speak to Renovation Real Estate about these options.

Work With Paul

Get assistance in determining the current property value, crafting a competitive offer, writing and negotiating a contract, and much more. Contact me today.

Follow Paul on Instagram