Homeowners looking to remodel have a few options for financing the work. Most of the options, though, are more difficult to get in the current housing market. Home equity loans are rare because few homeowners have enough (if any) equity to pay for anything more than an estimate on the home improvements. But there is one financing option out there for home improvements. It's the 203k renovation loan from FHA.
Current homeowners can refinance the house into the 203k, pay for the home improvements they want, and have a new mortgage that includes the work. This way it's one loan, one payment and the interest is tax deductible. It's a better option than credit cards and second mortgages.
But it's not simply a matter of just getting cash out of your house. There are some requirements you ought to understand before you start ripping out old appliances and flooring. Let's look at a couple of scenarios where a homeowner might want to remodel, and what the 203k requires.
If you owe more than what your house is currently appraised at, you'll need to have a down payment. The 203k refinance down payment is a little more than 2% (2 1/4% to be exact). On top of that, you'll need to make up the difference on what you owe and the value of the home. So if you're looking to refinance and remodel a house with negative equity, you'll need some cash up front regardless of the after-improved value of the home.
The other scenario is if you owe less than what your home is valued, then you'll likely need no money down. Of course, this could also mean that you may have enough equity to take out a HELOC and pay for the home improvements yourself. But if you're looking to have a $20,000 kitchen remodeling project but you only have about $5,000 in equity, that won't work. And that's where the 203k fills the gap.
Now, because this is an FHA product, standard credit score and income requirements apply. Your credit needs to be "good" and you have to be able to afford the new house payment. Because you're adding value to the home, it's a pretty good investment. But know that for every $1,000 in upgrades you finance, you'll add about another $6 a month to your monthly house payment.
Example: Your house payment is $600 and you want to finance a $25,000 kitchen remodel and new carpet. The home improvements will add approximately $150 to your monthly payment. Your new mortgage payment would then be about $750.