What are the pros and cons of doing a renovation mortgage?

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I am interested in doing a fix and hold on a property, but I was told I'd have to get a renovation mortgage. It seems simple enough, but I've never done one before.  What is the up- and downside?

Can you clarify what you mean by renovation mortgage?  Do you mean something through a hard money lender to cover the purchase and rehab?  Those are typically at higher points and interest rates than a conventional.

Is that what you are meaning? or something else?

I am trying to learn more about them.  But this one would be either through Fidelity or Homepath and is called a renovation mortgage.

When Borrowing the money I have done it two ways. One was a construction loan where you go get temporary financing based on the approved repair plan and value. A local bank gives you the money to take possession and has a reserve amount that you can advance as repairs are done. Max loan amount is usually 80% of the estimated repair value. At the end of the term, 6 months to a year, you have a balloon payment and either have to refi into another, more permanent type financing or sell the house and cash out the bank...hopefully with a nice profit.

The other way I did it was through an fha 203k loan on the first house I ever bought. It operates much the same way but with a lot more red tape and rules due to the nature of a government guaranteed loan.

The general process is the same...you pick out a house, you and a fha inspector go through it. He makes a list of what is required to meet fha guidelines and you make a list of additional things you want. He might mandate roof, mold remediation and some structural issues. You might want paint, carpet, windows, new appliances etc. You get bids for everything. I think I had to get 3 bids on everything. There are certain things you are allowed to do yourself, but in case you suck really bad, change your mind or whatever, you have to have a budget that includes labor for someone else to do it. If you succeed without it, great. That's less money you owe, or money you can use towards other things. If your budget was $20,000 and you only use $12.000 then either your loan balance is $8000 lower or you can spend that money on other upgrades. You don't get the money and can not pay yourself labor or be reimbursed for tools you buy to do jobs. Just materials and expendable items like paint rollers, tarps, razor blades etc.

Every month or so, the fha inspector comes out to inspect the work done. If he is satisfied, he will sign off on it and submit forms to the bank to allow reimbursement for your materials or to have the vendor paid for work done. The process continues until all work is done, usually with 6 months maximum to be done. And every time the inspector comes out, it costs you money...I think I paid $100.

But the good news is, they add up everything at the end...purchase price, closing costs, reimbursed expenditures and that total is your final loan amount and it auto converts to 30 year mortgage. Unlike with the construction loan I mentioned, you don't have to scramble to sell or refi...both of which require paying closing costs again.

The fha route is a pain with all the red tape but is great for the low down payment and some level of hand holding that comes with it in case you aren't a well seasoned, super handy investor with lots of tradesmen contacts.

While I don't know exactly what program you are referring to, since both are siblings of fha, I imagine they are very similar.

Good luck

That is exactly the kind of information I was looking for.  Thank you.