Buying a fixer-upper can be an affordable way to get into your desired neighborhood.
Is there a gap between the home you want and the home you can afford? If so, you might consider buying a home that needs some love with a renovation loan. These loans allow you to buy a home and get the funds you need to cover the costs of repairs, remodeling or renovations to the property - all with one loan.
That means you can upgrade your kitchen, create new office space, or renovate your master bath now instead of waiting until you can save up to make the renovations - one or two or ten years down the road. And in the end, you can be the proud owner of a home that's more valuable and easier to sell.
Who should consider a reno loan?
If you’re searching for your first home, you may be finding that a fixer-upper is all you can afford in the current market. In fact, 82% of millennials said they're more likely to buy a fixer-upper than a newly built home.*
Jerry Stewart, Director of Construction and Renovation Lending at Amerifirst, explains, “Because there has been so much anxiety on the market, people are saying, ‘I can’t get the top-tier homes. I’m going to buy a home in need of repairs instead.’”
In these situations, a renovation loan can be a great solution.
A reno loan may also be appealing if you already own your home. If you’re like a lot of other people, “nesting” during the pandemic may have you eager to update the surroundings where you’ve been spending so much of your time. You may have discovered that you’re more than happy to stay put and make repairs or renovations to your home and avoid the hassles, expense, and headache of searching, bidding, and moving to a new property.
A renovation loan can help you:
- Save money
Enjoy a lower interest rate and avoid using a high interest credit card.*
- Save more money
Claim a larger tax deduction (remodeling and home purchase interest combined)*
- Add value
Even minor kitchen and bathroom remodels can boost your home’s resale value.
- Love your space
Express yourself with an updated home that reflects your style and personality.
How does a renovation loan work?
Most home loans are based on the current value of a home, but a reno loan is based on the value of your home after you improve it. The loan covers the current selling price of the home plus an additional amount based on your contractors’ bids for the improvements. Your home is appraised as if the work is complete, giving you instant home equity (the part of your home’s value that you own, as opposed to your lender).
Paying for both the home’s selling price and the cost of improvements through one loan has advantages. Stewart explains, “At the time of purchase, you can spread your payment out over 30 years and transform the home into exactly what you want – whether that's installing solar panels, swapping older appliances out for energy-efficient ones, or creating a new ensuite with twin washbasins and a walk-in shower.”
Because interest rates, materials, and labor costs are all expected to climb, he says, “Locking in the projects you want to do at today’s rates definitely makes financial sense. Many people say, ‘We’ll get in a house and then we’ll get things done,’ but that can be a much more expensive route to take. With a renovation loan, you can lock in your interest rate and costs now, and eliminate those variables.”
Stewart also notes that reno loans may be more financially savvy than buying a home now and using a home equity loan to pay for improvements later. “Rates on home equity loans are going to go up because they’re tied to a different index,” he says.
What’s covered by a renovation loan?
The renovations you can make depend on which type of loan you choose. At Amerifirst, we offer two solutions:
FHA 203K Loan
- For your primary residence only
- Covers structural repairs, renovations, energy conservation, roofing, new appliances, landscaping, garage additions, and non-structural repairs
- Does not cover “luxury” items like pools or tennis courts
Fannie Mae Homestyle Loan
- For primary residences, second homes, or investment properties
- Covers any permanent improvement that adds value to the property
- Includes landscaping, room additions, swimming pools, spas, and more
Stewart says the most common improvements include kitchens and baths, new appliances, carpet, paint, new light fixtures, and major mechanical updates like roofing, windows, doors, and HVAC systems. Luxury items such as swimming pools, additional garages, and fencing have also been popular during the pandemic.
Keep in mind that no matter which loan you choose, all planned renovations made with these loans must be completed by a licensed contractor (FYI - we have strong relationships with area contractors and can provide you with a list of certified contractors).
How do I get started?
Buying a home with good bones and turning it into the home of your dreams is a path many homebuyers take. If you want to learn more about home reno loans, contact us today. We're proud to be ranked as one of the top FHA 203(k) providers by the Department of Housing and Urban Development for several years running and we have an entire team devoted to helping our customers explore renovation home loan options. We're here to help!
You can learn more about our home renovation options by downloading our ebook today.
*BofA Research's Sixth Annual Millennial Home Improvement Survey
**Not intended as credit counseling, financial or investment advice. Contact your financial representative for more information.