Home Renovation Loans

There are two little-known home renovation mortgage programs for buyers and homeowners who want to renovate a home and roll the costs into their mortgage.

Both Fannie Mae and the Federal Housing Administration (FHA) have home renovation programs that allow buyers to borrow based on what the house is expected to be worth after the home renovation is completed. Current homeowners can use either program to refinance their existing mortgage, plus the renovation costs, into one new mortgage.

Homebuyers and homeowners can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an appraiser. Homeowners can make property repairs, improvements, or prepare their home for sale.  Homebuyers can make their new home move-in ready by remodeling the kitchen, painting the interior or purchasing new carpet.

Fannie Mae HomeStyle Loans

The HomeStyle Renovation Mortgage provides a convenient way for borrowers to make renovations, repairs, or improvements totaling up to 50 percent of the as-completed value of the property with a first mortgage, rather than a second mortgage, home equity line of credit, or other, more costly financing method.

The funds can be used for any repairs or renovations that are permanently affixed and add value to the property. Eligible borrowers include individual home buyers, investors, nonprofit organizations, and local government agencies.

The “as-completed” value is the market value of the home factoring in the improvements and renovations.

HUD Streamlined 203(k) Loans

FHA’s Streamlined 203(k) program permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home.

Eligible borrowers include individual home buyers, existing homeowners and nonprofit organizations.

The value of the property is determined by either (1) the value of the property before renovation plus the cost of renovations, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

What improvements are eligible under the Streamlined (k) program?

The Streamlined (k) program is intended to facilitate uncomplicated renovation  and/or improvements to a home for which plans, consultants, engineers and/or architects are not required.

The Streamlined (k) program can include the repairs shown below:

• Repair/Replacement of roofs, gutters and downspouts
• Repair/Replacement/upgrade of existing HVAC systems
• Repair/Replacement of flooring
• Repair/Replacement/upgrade of plumbing and electrical systems Minor remodeling, such as kitchens, which does not involve structural repairs
• Painting, both exterior and interior
• Weatherization, including storm windows and doors, insulation, weather stripping, etc.
• Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
• Accessibility improvements for persons with disabilities
• Lead-based paint stabilization or abatement of lead-based paint hazards
• Repair/replace/add exterior decks, patios, porches
• Basement finishing and remodeling, which does not involve structural repairs
• Basement waterproofing
• Window and door replacements and exterior wall re-siding
• Septic system and/or well repair or replacement

 What items remain ineligible for the Streamlined (k) program?

Properties that require the following work items are not eligible for financing    under the Streamlined (k):

• Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall
• New construction (including room additions)
• Repair of structural damage
• Repairs requiring detailed drawings or architectural exhibits
• Landscaping or similar site amenity improvements
• Any repair or improvement requiring a work schedule longer than six (6) months
• Renovation activities that require more than two (2) payments per specialized contractor

The Streamlined (k) program cannot be used to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined (k) Eligible Work Items above or that would:

• Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”
• Require plans or architectural exhibits
• Require a plan reviewer
• Require more than six months to complete
• Result in work not starting within 30 days after loan closing; or
• Cause the mortgagor to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case, the borrower would be able to occupy the property after mortgage loan closing.)

HUD 203(k) Loans

A standard HUD 203(k) loan covers the purchase or refinancing and renovation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as renovation is completed. The cost of the renovation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area.

The value of the property is determined by either (1) the value of the property before renovation plus the cost of renovations, or (2) 110 percent of the appraised value of the property after renovation, whichever is less.

What improvements are eligible under the 203(k) program?

The extent of the renovation may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of renovation is eligible, for example, provided that the existing foundation system remains in place. A 203(k) loan can finance the renovation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure. The types of improvements that borrowers may make using 203(k) financing include:

• structural alterations and reconstruction
• modernization and improvements to the home’s function
• elimination of health and safety hazards
• changes that improve appearance and eliminate obsolescence
• reconditioning or replacing plumbing; installing a well and/or septic system
• adding or replacing roofing, gutters, and downspouts
• adding or replacing floors and/or floor treatments
• major landscape work and site improvements
• enhancing accessibility for a disabled person
• making energy conservation improvements

Unlike the Streamlined 203 (K) loan, the use of an FHA consultant is required.

HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.

First Nations will work to advise you of your best choice for financing home renovations. Call today to learn more.