Examples of How to Finance a Home Purchase & Renovation
Examples of How to Finance a Home Purchase & Renovation
Here on New Year’s day I thought it would be helpful to write about how my clients have financed home or investment property purchases and renovations this past year. Doing a review may answer questions others might have about how to proceed with their own thoughts on buying and renovating this year.
There are several mortgages designed for the purpose of allowing buyers to purchase a home or investment property and include all the funds needed to renovate a property in the same loan. Each of the loans described can have up to a 30 year term with an interest rate fixed for that length of time. Down payment for a primary residence can be as little as 3.50% down and 15% down for a 1 unit Investment property. The down payment is always based on the sum of the purchase price plus the renovation dollars needed.
The 3 renovation loan types used most last year were HomeStyle by Fannie Mae, VA Renovation for Veterans and FHA 203K. Each loan offers the benefit of using the home’s future value or “as completed” value for a loan approval. This means a General Contractor(s) written proposal detailing all rehab work and associated costs is read by an Appraiser to then project the future value the property will attain when fully renovated. All renovations begin after closing on the purchase of a property. Each of these loans can also be used to refinance a currently owned property to create renovation funds as well.
Below I will present each of the three renovation loan types and give examples of what clients have done this past year for their properties with each loan.
HomeStyle- This one is a Conventional renovation loan that can be used for a primary residence of 1 to 4 units (condominiums, townhouses, single family), vacation homes and 1 unit Investment properties to rent out or resell. The important rule in HomeStyle is the rehab portion of the mortgage cannot be greater than 75% of the future value of the property. This rule is meant to prevent a property from being over improved for the local market. Currently I have clients using this loan to convert a 2 unit property to a single family residence as well. I have written a Blog post about that conversion process in https://perryfarella.com/2018/11/convert-a-2-unit-property-into-a-single-family-home-financing-options/ .
- One of my investor clients used HomeStyle for a small single family home to totally gut renovate. It had been purchased at a tax sale for $9000.00 in cash earlier. The client needed some $70,000 to complete the renovation. He had used some of his own funds but needed the mortgage money to complete the home. This was then a refinance HomeStyle loan since he already bought the house for cash. During loan approval the house was given a projected, “as completed” value of $106,000.
- One client used HomeStyle to rebuild a 2 story row house built in 1872 that beenvacant and open to the elements for some time. It was a home with no mortgage on it. He borrowed some $250,000 to rebuild it into a 4 bedroom, 3 bath modern residence. This is an example of a refinance renovation loan. Original fireplaces and staircase were retained but he gave it a contemporary, open floorplan. It was appraised in advance to be worth $550,000 when completed. The client plans to lease the home to tenants and is expecting to rent it for more than the monthly total payment.
- Another client used Homestyle to purchase an outdated home in need of updating to be a primary residence. The plans included adding a master bathroom, remodeling an existing bath and doing miscellaneous minor updates around the home. With HomeStyle on a purchase of a primary residence the down payment can be as little as 5% (3% if a first time buyer).
As you can see HomeStyle is popular with small Investors seeking funds to renovate properties they will not live in personally but lease to tenants. I have written recently in another Blog post of the particulars HomeStyle has versus working with funds from a Hard Money Lender if you are an Investor in https://perryfarella.com/2018/10/rehabbers-looking-for-alternatives-to-hard-money-lenders/ .
VA Renovation- This one is a VA loan for Veterans seeking funds to do a limited renovation on a primary residence. Here the VA guaranteed loan is for 100% of the cost of purchasing the home and adding needed renovation dollars into it. There is no down payment required for eligible Veterans. The rehab portion of the loan is typically limited to be equal to 25% of the homes future value, or “as completed” value. The reason why is the VA wishes to see only limited remodeling with no structural changes that can be completed within 90 days. I have written a Blog post on the details of the VA Renovation loan here https://perryfarella.com/2018/02/va-renovation-loan-added-dollars-remodel-repair-home/ .
- A Veteran client purchased a damaged foreclosure home using this loan with no down payment and added some $44,000 to remodel a kitchen, update 2 baths and install hardwood floors, etc. This is a great loan that is still little known even among Veterans. It can be used to retrofit a home for a Veterans needs for example or just restore a damaged property to livability.
FHA 203K- This one is for Buyers and owner’s who will occupy only, no Investors allowed. Here the down payment can be as little as 3.50% down on single family homes, 2 to 4 unit small apartment buildings and Mixed Use buildings with 49% max commercial space and 51% minimum residential space. I have found this is the most popular loan for Buyers purchasing a 2, 3 or 4 unit property because of the low down payment. An additional feature is FHA allows 75% of the expected gross rents from the other apartment(s) to count as extra income forborrowers to qualify for the loan size needed. This is often a great approach for a first time Buyer to rehab a 2 unit and use 75% of the rent from the second apartment to qualify for the size mortgage needed. I have a past Blog post reviewing this approach at https://perryfarella.com/2018/07/how-to-buy-rehab-a-2-unit/ .
- One client purchased a 3 unit apartment building and added funds to fully renovate the entire building. Funds included all new wiring, plumbing, new kitchens and new baths for each apartment. The property was purchased as an estate sale for $165,000. The renovation budget was $185,000 so total cost was $350,000. At the time it was appraised from the General Contractors written rehab proposal to be $365,000 when completed.
- Another client purchased a 2 unit apartment building for $185,000 as a first time buyer with a 3.50% down payment and added $65,500 for renovation. The total investment was the sum of the two or $250,500. This was a damaged foreclosure property.It was appraised to have an “as completed” value of $270,000. The projected rent from the other apartment was forecast by Appraiser to be $1300 monthly. The Buyer will live in the other apartment with the rent coming in that may pay more than half of the monthly total house payment.
- One other client purchased a single family foreclosure home for $177,000 and added $37,000 for minor renovations. The sum of the two is then $214,000.The home was Appraised to have an “as completed” value of $245,000. Renovation included new carpeting, updating 2 baths, repairing broken cabinets, painting and a new furnace.
- Another client used this loan as an alternative to a commercial loan to purchase a 2 unit Mixed Use building that has 1 apartment and 1 office space. Since the Buyer will live in the apartment the 203K worked for him with better terms than a commercial loan. He borrowed an additional $5800 to do miscellaneous minor repairs and painting. I have written a Blog post detailing how a 203k is an alternative to a commercial loan for a Mixed Use property in https://perryfarella.com/2017/07/mixed-use-property-finance-using-203k-instead-commercial-loan/
I hope this Blog has given good ideas of how each of the renovation loans can be made to work for different circumstances. There is a renovation loan for nearly every situation for Buyers, Investors and owners. In todays environment where there may be less supply of updated properties to choose from a renovation loan allows the “ugly duckling”, less appealing properties to be considered. I always say buy the worst property in the best location since the better properties around it will raise the after renovated value of the worst property. In my Blog you will find other examples of these loans and answers to many questions. Please call or write with any questions anytime.