Renovation

kr-cabinetview1Various forms of Renovation Financing allows homeowners to improve their property with less up- front cash, they finance the cost of renovation over the life of the loan.  This will focus on FHA renovation financing as it is the most flexible, most commonly used financing product.  This product is used both out of necessity (purchasing a foreclosure that has safety hazards such as mold) and for cosmetic reasons (finishing your basement).

m1x00082_basementSimplified Example:  Your home is currently worth $300,000.  You want to remodel your kitchen and finish your basement.  Total repairs are estimated at $50,000 by a contractor of the borrowers choosing (they must be licensed to do the work).  The lender will then send out an appraiser and ask that they appraise the “after-improved value”.  Lets assume this is $330,000 (since you often do not get dollar for dollar increases in value for work that is completed).  Using $330,000 as the basis for the value, the lender now uses FHA guidelines, financial calculation guidance, to determine the loan amount.  The total loan amount can be up to 110% of the after-improved value.  An excellent resource for locating contractors, visualizing changes and estimating cost can be found at www.servicemagic.com.

Imagine a foreclosed home that has been sitting for 8 months.  It has problems with exposed wiring, water damage and mold.  The purchaser can not make the repairs because they do not yet own the home.  The bank is unwilling to make the repairs because they desire to sell the property as-is.  FHA Renovation Financing could be identified when making an offer on the home.  Institutional property owners are becoming more savvy and knowledgeable and this would actually make your offer stand out among mutliple offers.  Why?  Because the institutional property owners know that FHA Renovation Financing is a viable means to get loans done in a way that requires no out of pocket expense for the seller.  With the competing non-FHA Renovation offers the seller will realize that they will be required to make repairs in order to move this property.

FHA is not the only renovation financing, there is conventional renovation financing as well.  This is not as popular for primary residences because it requires larger down payments, but is a popular renovation loan vehicle for investors (FHA does not allow investors).

For questions about renovation loans please email me at michael.pfeffer@pncmortgage.com.

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