How to Obtain a Home Renovation Loan

How to Obtain a Home Renovation Loan
06/11/2018

Are you thinking about a home renovation?

We’ve talked about completing a renovation project versus building new construction, and the pros and cons of each based on your timeframe and budget.

So let’s say you’ve decided to stay in your current home and renovate – what’s next? How do you secure the funding, and how is it different from obtaining a regular mortgage loan or a construction loan? To answer these questions, we turned to our trusted mortgage expert, Dino Paone, who’s a specialist in Construction and Jumbo Lending at Santander Bank.

How are home renovation loans different from regular mortgage loans or construction loans?

The main differences between a construction loan and a renovation loan are loan size limits and scope of work differences. The loan limits for the Fannie Mae Homestyle renovation loan and the FHA version, the 203k, are currently both just under $700,000.*

Scope of work comes into play as well. Renovation loans can be used when the existing structure is being updated with very little or no additional square footage being added. A construction loan is what we would use when a client is adding square footage, opening up exterior walls, exceeding the Fannie Mae and FHA loan limits, or any combination of the above.

How do home renovation loans work? Do I need blueprints from an architect and an estimate from a contractor? What’s the first step?

A home renovation loan works very much like a construction loan. You do need a full set of plans and specs for the work to be done, as well as a set of costs and a contract with a builder. The builder must be approved in advance.

You’ll also need what’s called a Feasibility Study. Fannie Mae and FHA have their own rules regarding the Study – but in general, they assign an appraiser with construction experience to examine the plans and sign off on the feasibility of the work to be done based upon the neighborhood, comps and general direction of the project. The Feasibility Study is in addition to a required upfront appraisal of the property value post construction. This study is a unique requirement for renovation loans, and does not happen on a regular construction loan.

But the first step, as with any good process, is to speak with an expert mortgage advisor before starting the rest of the process. This is not a rate game. This is 100% an advice game. Get it right, and you’ll be very happy. Get it wrong, and it might end up being a very painful process with time and money wasted.

And remember, the right advisor is not someone that works at the bank that has the product. It’s the person at the bank that is an experienced product expert and can use the methods and products most suitable for the desired result. Frankly, there are not many of us. Put all of your effort into finding us, and then be really good at following our direction.

Is it difficult to obtain a renovation loan? What kind of credit score do I need to have?

From an underwriting standpoint, qualifying for a renovation loan is not much different than qualifying for a standard home mortgage. Program ratios and loan to value rules are similar to most regular mortgage loan programs. The difference is in all of the other moving parts that are unique to renovation financing. In addition to borrower approval, there is a separate builder approval (good credit standing, resume of jobs completed, etc.), extra reserve requirements (amount of money required for you to have in your possession after down payment and closing cost requirements are met), Feasibility Study and a few other small items.

Credit Score requirements are similar to conventional loan requirements. Like those, lower credit scores require higher down payments and vice versa.

Will I be able to obtain a mortgage and a renovation loan at the same time?

Yes – renovation loans are one-time closing loans. This means that you’ll close your loan with a locked-in interest rate, and the loan you use for the renovation is the same loan you’ll have when the work is complete. It’s one set of closing costs, one rate and one closing – so that part is fun and economical!
 

What are the rates and repayment terms like?

Repayment terms are similar to a regular mortgage. You can pick any loan term that you qualify for, and we can help you choose the right one.
 

What if I run into a problem and need additional money for the renovation? What are my options?

One of my favorite questions! The process for a renovation loan is pretty detailed. It’s that way for good reason – so your bases are covered and you have the money to complete the job. Not being able to complete the job is bad for the homeowner, and worse for the lender. That said – when the money runs dry, the job still needs to be finished. In that case, cash or the Bank of Dad are the best ways to finish up the job.

Best case scenario – what if I come in under budget? Can I use the money for anything else?

Like a new jet ski? Unfortunately, no. Loan proceeds can only be used to pay for items that pertain to the building, renovation and completion of the home. If there is any unused money, it simply goes unused, and your final loan terms are based upon the money used and not the original amount borrowed.

*These numbers are constantly changing. Check with a reliable mortgage expert for the most up-to-date information.

About Dino Paone

Dino PaoneDino Paone is an Expert Mortgage Specialist at Santander Bank specializing in Construction and Jumbo lending.

Dino gives all of his clients his full, undivided attention. He has spent three decades honing a reputation of honesty and integrity. Contact him here, at 732-223-1901 or at dino.paone@santander.us to learn more.

NMLS# 39919

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