Homeowner Tips

Know Which Home Renovation Loan Suits Your Plans

By: Guild Mortgage Inlanta Grand Rapids Team

The spring real estate market is ramping up in West Michigan, and for some, there’s no better time to consider a major home improvement project. In a hot market, there are many reasons why home renovation loans such as Homestyle and FHA 203K become popular. The team at Inlanta Mortgage Grand Rapids can help you find the perfect fit to finance your feng shui, depending on your needs, goals and current financial circumstances. We’ll take a look at different scenarios, including the benefits of home renovation loans in general.

4 Benefits of Home Renovation Loans

• Low down payments available
• Ability to wrap in all renovation costs into the loan
• Good interest rates
• Mortgage interest is tax deductible; other types of loans aren’t

Scenario A: Love the House You’re In

Many people decide to “stay put” when real estate inventory is tight and prices are strong. In other words, the motto for these folks is:  love the house you’re in.

Sometimes, it takes a bit of “work” to regain that lovin’ feeling, like a walk-in glass and slate shower or perhaps a gorgeous great room or marvelous man cave. Extending your stay and improving your home’s curb appeal can represent a smart investment, provided your project is scaled to values in your neighborhood. In a market where values are high and inventory is tight, deciding to stay put and improve your home can be a wise financial decision for some.

“Homeowners should look at their home value, equity, and plan for the future as part of their annual due diligence. With the right combination of circumstances, these home refinance programs can be a great tool to say goodbye to that 1970s shag carpet or that tile you can’t stand and really live out your HGTV fantasies while at the same time optimizing your available credit,” says Jonathan Arnold, Branch Manger at Inlanta Grand Rapids.

The upside is that instead of moving to a more expensive home that already features some of the upgrades you’d like, you’re improving the value of an existing asset, and thereby increasing the likelihood of bettering your future return-on-investment. This is true whether your home is a single family home or up to a 4-unit rental in which you reside.

Depending on how much equity you’ve accumulated and your loan-to-value ratio based on a new appraisal, you may be a perfect candidate for a Conventional Homestyle Renovation loan, which for those with higher credit scores and a LTV of 80% or lower, can avoid PMI (private mortgage insurance) entirely. (See Home Renovation Loan Programs below.)

Scenario B: The Purchase-Reno Combo

In this scenario, you’re a savvy shopper in the market for a new home. You might be a first-time buyer with your eye on a “fixer-upper” or a seasoned homebuyer trading up, or even an investor looking to purchase a 1-4 unit dwelling. In each case, you know that many of the well-staged, well-maintained properties are selling above asking price, and often with multiple offers submitted. But you also know that if a home has “good bones” and the right location, a sleeper can become a swan in the right hands – yours! In this case, you’d be a good candidate for a combination purchase-renovation loan.

Determining which loan program suits your circumstances will depend on your financial picture, but there are some common criteria to evaluate in order to determine which purchase-renovation mortgage is right for you:

• You have access to an excellent contractor familiar with home renovation loan specifications.
• You’re working with a lending specialist like Inlanta who is registered to offer both Homestyle Conventional and 203K Home Renovation loans, with and without a consultant.
• You do not intend to do the work yourself. Some types of loans will be highly reliant on licensed, professional, line-item estimates from licensed or approved trades, as well as services such as engineering or architecture. These documents can be used in assessing end value of your home.
• Whether or not you intend to reside at the residence (or up to a 4-unit dwelling) will make a difference as to which loan program will suit.

According to Brian Ferrick of Inlanta Mortgage Grand Rapids, renovation loans aren’t difficult by default, with one key provision: the team.

“Get the right team to be part of the transaction and things will go well.  You need a good Realtor, a good Lender who has done many of them, and a good contractor.  The team makes the transaction,” Ferrick said.

Home Renovation Loans offered by Guild Mortgage Inlanta

Highlights of a Fannie Mae Homestyle Conventional Loan

(Purchase or Refinance & Remodel)

• Fannie Mae offers a conventional renovation loan that allows clients to finance the cost of any repairs and renovations. You can do 1-4 units on Primary residences, 1 units on second homes and investment properties.
• Purchase or refinance & remodel
• 5% minimum down payment for primary, single-family residences (10% for second homes)
• You can use gift funds for down payment & closing costs for owner-occupied, primary residences
• 3% seller contribution allowed
• Cosmetic and structural renovations allowed
• Allowable improvements can include landscaping, appliances, swimming pools and more
•  The maximum you can finance is up to 50% of the appraised amount.
• Renovation-related costs that may be considered as part of the total renovation costs in addition to labor and materials include: Property inspection fees; Costs and fees for the title update; Architectural and engineering fees; Independent consultant fees; Costs for required permits; and Other documented charges, such as fees for energy reports, appraisals, review of renovation plans, and fees charged for processing renovation draws.
• Lower interest rates than the standard home improvement loan.
• Flexible mortgage term options with 15 or 30 years.
• Does not require mortgage insurance (MI) if LTV is 80% or below.
• LTV is taken into consideration after renovation is completed (can be great for homeowners who owe more than the value of your home).

Highlights of a FHA 203K Limited Loan (formerly known as 203K Streamline – “Cosmetic”)

(Purchase or Refinance & Remodel)

• The 203(k) Streamlined Loan is designed primarily for cosmetic upgrades that do not require the use of a consultant, architect, and engineer or as many inspections as the Standard 203K (formerly known as the Full 203K).
• Like a regular FHA new home purchase, down payment can be as low as 3.5% for primary, single-family residences.
• It is a renovation loan that allows a minimum of $5,000 with a maximum up to $35,000 worth of renovations to be wrapped into an FHA loan. 
• It is for primary residences only.
• It is designed for any renovation that is connected to the home directly and does not include landscaping, blueprints, or foundation work.
• This makes it a popular option when a typical FHA loan is considered since upgraded flooring, paint and a kitchen are key elements of cosmetic improvements to a home. This loan can imclude appliances.

Highlights of a FHA 203K Standard Loan (formerly known as 203K Full – “Additions, Structural, Etc.”)

(Purchase or Refinance & Remodel)

• The FHA 203K Standard loan (formerly known as 203K Full) is intended for more complicated projects that involve structural changes such as room additions, exterior grading and landscaping.
• Like a regular FHA new home purchase, down payment can be as low as 3.5% for primary, single-family residences.
• A Standard K is also used if your project requires engineering or architectural drawings and inspections.
• One benefit with this form of the 203(k) is that a single family property may be converted into a two, three or four-unit dwelling or vice versa so long as the owner occupies one of the units.
• It is a renovation loan that allows up to the maximum financed amount of renovations to be wrapped into an FHA loan. 
• It is for primary residences only and requires an FHA consultant.
• By combining the construction funds with your home mortgage, an FHA 203(k) loan limits closing costs because it’s just one loan that provides you the necessary funds to buy a home and make the desired repairs or improvements.
• An FHA 203(k) loan simplifies the home renovation process.
• FHA 203(k) loans are backed by the federal government and are typically given to buyers who want to purchase a home and perform upgrades, repairs, remodel or customize to their needs and wants.

Comparing Fannie Mae’s HomeStyle and FHA 203K Home Renovation Loans:

Fannie Mae’s HomeStyle and 203k loan both finance improvements in concert with a purchase loan. The Fannie Mae HomeStyle loan’s minimum down payment is around 5 percent, while FHA 203k’s may only require 3.5 percent. HomeStyle lenders typically require higher qualifying credit scores but feature lower closing costs than those commonly charged on FHA 203k loans.

At the same time, a 203k loan can be used to complete renovations or upgrades on a new or existing home. As with HomeStyle mortgages, the borrower must use approved, licensed professionals to do the renovation work.

Fortunately, the experts at Inlanta can answer your specific questions about the types of repairs and renovations you can perform when you finance your home. Contact us for a deeper look at the smoothest route to your new or improved dreamhome.