It’s an accepted fact that homes that have aged require renovation and fixing up. Depending on the age, condition, and the owner’s needs, the cost and amount of time that is involved in the renovation work can vary. The repair work involved to bring up a home to acceptable inspection standards can range from minor to major.
The source of financing for the fixing up existing residential homes over the years has primarily been through the equity built up in the property. This equity was tapped by homeowners through a home equity loan, second mortgage or a line of credit. In the case of home buyers intending to fix up a property that they intend to purchase, the source of funds for rehabilitating a home has been through either hard money loans or personal funds. Since the financial crisis of 2008, the residential mortgage lending market has undergone significant changes. The new reality is that the lending guidelines for HELOCs have become much tighter and exclude all but a few borrowers that can meet those raised standards. Moreover, financing for renovating homes has all but moved to the fringes of real estate lending spectrum.
Another practice that was common among borrowers looking to buy a home that needs repair work was to do the work themselves. This was beneficial to them in a number of ways. In addition to lowering the cost involved, it also enabled them to build up “sweat equity”. This has the dual benefit of lower costs and higher home value. While this may suit repairs that don’t involve much skill, it simply would not work for extensive rehabilitation.
Hiring Professionals to do the Rehab Work
Considering all the limitations mentioned above, the alternative is to go the professional way. Hiring an experienced professional can be a bit more expensive, but at the same time the finished work is highly likely to be polished and durable. Additionally, a properly written contract prior to the initiation of the work can keep you safe from shoddy work and future issues involving the contracted repair work.
So we can all agree that the best way to go about fixing up a home that involves extensive renovation work is to hire a professional contractor. While that’s a great idea, the big question is about how to secure the necessary financing? Can the needed work be financed right at the time of a home purchase? Are the interest rates for rehab loans higher?
There a number of misconceptions and doubts that home buyers have when it comes to renovation mortgage loans. This is understandable as these types of homes fall out of the standard, conventional home loans. Keeping all these concerns in view, a number of home renovation loan programs have been floated by both Fannie Mae and FHA to assist borrowers purchasing fixer-uppers.
What is a Home Renovation Loan?
A home renovation loan basically provides the required financing needed not only for the purchase of the residential property but also allows for the cost of repairs to be included in the loan amount simultaneously. The approved funds for the repair work are financed into the loan amount right at the time of initial closing itself. They do not come from a separate second loan or a line of credit such as an HELOC. This primary feature distinguishes a residential renovation mortgage from other types of rehab loans. The borrowers enjoy a simpler process without the need for two separate loan approvals. Also, they have just one convenient monthly payment with all the tax benefits afforded to homeowners.
Consider Alternative Financing Options for Fixer-Uppers
Suppose you want to buy a piece of property to flip. The problem is, you can’t afford to pay out of pocket, and you know several other people are eyeing that piece of property for the same purpose. What can you do to get a quick approval?
Seek a Hard Money Loan
When you apply for traditional mortgage loans through a bank, if often takes weeks or even months to get approved. When you apply for a hard money loan, on the other hand, especially if your lender is local, the approval time may be cut to mere days.
This is because the lender doesn’t care that your credit score is less than perfect or that you reported almost no income on your taxes for the last three years. All he or she cares about is the market value of the property. Some private lenders want a home inspection to establish the value, but a surprising number will simply drive by and look at the property in question.
Sweeten the Deal – After Refurbishment Value
Hard money lenders will typically loan you up to 70% of the fair market value of the property you are buying. If you are buying distressed property, however, and plan to fix it up before selling it, you may be able to talk the lender into providing 70% of the ARV (after refurbishment value). This gives you some extra money with which to perform the needed home repairs.
Your Presentation Helps
Hard money mortgage loans are high-risk loans for lenders. A big part of getting approved quickly, especially if you have not worked with this particular lender before, is showing the lender that you know what you are doing. If you are planning to refurbish property and then resell it, have a specific plan of action to show the lender. It’s also important to convince the lender that you have a valid exit strategy. Most hard money loans last only a few months to a year or two. By the time the loan comes to term, you should be out of the house or in a position to refinance.
If you are flipping the house, your exit strategy is to fix it up as quickly as possible and sell it to a home buyer at a profit. You will be far more credible as a borrower if you have done this successfully before. If this is the first time you have flipped a house, do your homework and convince the lender that you and your business venture are an acceptable risk.
Although hard money lenders always have the option to foreclose on your property if you don’t pay, foreclosure is a lengthy and expensive procedure, and most lenders of all types would rather avoid it if possible. Your key to getting quick approval for a hard-money loan is to show the lender you know what you are doing and that he or she can count on you to repay the loan as promised.