First, let's look at what a renovation mortgage is all about:
You will find a variety of homes in today's real estate market in all conditions: fixer-uppers, new construction, well-maintained or maybe a full rehab. Sometimes you can find a good deal on a fixer-upper listed "as-is." This means you buy the home in the condition it’s in, and will assume responsibility for making any repairs or renovations it may need. Of course, when you're looking at a "good buy" because your funds are low, you may have a problem paying for the work. Here is where you can use a "Renovation Mortgage."
A renovation mortgage allows you to borrow money to pay for the home and repairs, paying it off in one monthly mortgage payment. One of the benefits to a renovation mortgage is the tax write-off that comes with mortgage interest payments. It’s also a way to finance work without using consumer credit at much higher rates. Because this mortgage option takes into account the after-improved value of the house, you can buy a home for a lower price, make improvements to hopefully create value and end up with instant equity.
- A home is listed for $55,000
- The home needs $20,000 in work to make it livable
- The after-improved value of the house would be about $75,000
- Other similar homes in the area are appraised for $80,000-$85,000
- With your renovation mortgage of $75,000 you could have $5,000-$10,000 in equity depending on the value of the work done
HomePath® Renovation Mortgage
Fannie Mae-owned homes eligible for HomePath financing that need a little work or some repairs may be eligible for a HomePath Renovation mortgage. this means the you can have the benefits of a HomePath mortgage loan and a renovation mortgage all in one. Of course, there are some restrictions to the HomePath Renovation mortgage. The maximum renovation amount cannot exceed 35 percent of the "as-improved" value, and cannot cost more than $35,000. Also, like HomePath mortgages, no mortgage insurance is required*.
You can pay for repairs and cosmetic improvements such as appliances, fences, decks, floors, and more. The only requirements are that renovations be permanently affixed to the property and add value to the property. This includes landscaping, as long as it adds value to the property, is a permanent part of the property, and is supported by the "as-improved" appraisal.
Funds are distributed to the renovation contractor through an escrow account. At settlement, the lender funds the escrow then distributes the money to the contractor upon request as the renovations are completed.
*Talk to a mortgage consultant about costs associated with loans without mortgage insurance.
If you'd like to learn more about HomePath Renovation mortgages, download the free buyers guide at the button below. And learn more about HomePath Renovation vs FHA 203k so you can decide what works best for you.
(renovation photo: Flickr user Sarah Ackerman)