Purchasing a home in need of renovation can be thrilling. The fantasy of most of us is turning an old, tired property into our dream house. But the work of renovating also poses challenges. One of the biggest is money. You can also use renovation loans to cover the costs of repairs and upgrades. If you’re considering purchasing a fixer-upper, knowing your loan options can help make the process easier.
What Are Renovation Loans?
Renovation loans are special home loans that include money for buying a house and also fixing it up. Rather than applying for two separate loans, you can apply for one loan and use the proceeds to buy the property and pay for the rehab. In this way, one does not have to manage additional money for renovation.
Types of Renovation Loans
1. Home Improvement Loan
This is a personal loan that you can use for small repairs or upgrades. It typically offers a shorter repayment period and higher interest rates as well.
2. Home Equity Loan
For homeowners, it is possible to borrow against the value of one’s home. That’s handy for larger improvements, but you need top-notch credit and sufficient equity to use it.
3. FHA 203(k) Loan
It’s a type of loan for fixer-uppers that is widely known in the United States. It wraps cost of house and repairs in a single mortgage. There are two types:
- Standard 203(k): For extensive projects that involve structural changes.
- Limited 203(k): For small repairs and aesthetic improvements.
4. Fannie Mae Home Style Loan
This type of loan lets you borrow money for the renovations and pay the costs into your mortgage. It applies to primary homes and investment properties alike.
Tips for Financing a Fixer-Upper
1. Set a Realistic Budget
Construction costs often exceed budget. Always have a cushion of, say 10–15% extra.
2. Get a Professional Estimate
Don’t WING it and guess at the repair costs. Request detailed estimates of their work before you close your loan.
3. Focus on Value-Adding Renovations
“The money spent on improvements should result in the value of your home increasing,” he said.“Spend dollars toward upgrades you would like to see at a future open house, such as kitchens, bathroom or energy-efficient features.
4. Check Loan Terms Carefully
Check interest rates, repayment period and any hidden fees. A lower monthly payment can also be more expensive in the long run.
5. Improve Your Credit Score
Higher credit scores will earn you lower interest rates. Pay off and don’t take on new credit before you apply for a loan.
6. Work With an Experienced Lender
Renovation loans aren’t all that understood, some lenders fear. Pick one who knows how to finance a fixer-upper.
Common Mistakes to Avoid
- Underestimating costs
- Ignoring inspection reports
- Taking on more debt than you can handle
- Starting work before loan approval
FAQs:
Q1. Can I receive a renovation loan if I’m not purchasing a new home?
Yes, some banks do lend to homeowners who are not already living in the home.
Q2. Should I use a personal loan or renovation loan?
Small repairs may be funded with personal loans, but bigger projects would be better suited to renovation loans, which are offered at terms extending over a longer period.
Q3. How much can I borrow for renovation?
It will depend on your level of income, credit history and the value of your property. Lenders typically pay 80–90% of the cost of renovations.
Q4. Do renovation loans need collateral?
The majority of renovation loans force you to use your property as collateral. Unsecured personal loans often require no collateral, but feature higher interest.
Q5. How long does approval for a renovation loan take?
It can be anywhere from a handful of days to a few weeks, the length dependent upon whether it’s an SBA loan or non-SBA loan and how much paperwork is involved.
