Financing a Home Improvement By Adding it to Your Home Mortgage

If you are a home buyer or homeowner who wants to renovate a house there are a few home renovation packages that you can add on to a mortgage. For instance, both the Federal Housing Administration and Fannie Mae allow home buyers to borrow on their mortgage based on what they expect the home to be worth after renovations are complete. Additionally, homeowners can use the programs to refinance their already-existing mortgage to add on the improvement costs as one loan. A few years ago there was nowhere as close to the same demand as there is today for home renovation loans. This is because, after the housing crisis, very few lenders are willing to give out lines of credit or a second mortgage to fund renovations. Adding on to your existing mortgage is a way for you to purchase and then renovate a home or to renovate your existing one.


How Adding On to Your Mortgage For Home Renovation Works


Renovation loans are different from credit lines in that they require you to demonstrate that the money went into renovating your house. Home improvement loans can be an excellent tool if you want to purchase a discounted house that needs a bit of TLC. If you do not have perfect credit than the FHA 203(k) is recommended as they do not require a great score. On the other hand, a HomeStyle lender typically requires you to have a score higher than 660 and to obtain the best interest rate you should have at least a 740. If you decide to take out an FHA loan, then be aware that the minimum down payment is 3.5 percent of the total house’s value with the addition of the renovations. However, this is much better than conventional mortgage loans that require at least 10 to 20 percent.


Loan Basics


Although it depends on the type of remodeling finance program you decide to utilize, in most cases you will be given a 15 to 30-year term option. You can decide on a fixed or adjustable interest rate. Both will typically be a bit higher than the interest rates that are on the market. However, there are no balloon payments. Your mortgage will be the projected value of your house after renovation plus the additional cost fixing the home. There is typically more paperwork, and it takes longer to process than with a traditional mortgage loan. Renovation loans do not cover adding a luxury item onto your house such as a pool. However, you may take one out for the cost of removing or repairing a pool. You can also use it to add solar panels to your home. The amount that you can borrow depends on the location of the property. The limit can range anywhere from $271,050 to $729,750 for a single-family property. If you want to complete some minor renovations than the limit will be $35,000 for an FHA loan.


Hiring a Consultant to Inspect Your Home


The FHA’s 203(k) program mandates that you hire a consultant to look at the construction plans and inspect each draw. A draw occurs when the contractor receives a portion of the money going to renovations. You have as long as six months to complete a home improvement project and can draw money as many as five times. Paying a consultant to look at the planned renovation will range anywhere from $400 to $1,000 depending on the extent of the necessary renovation or repair. The consultant also will make sure that any restoration made maintains the house’s government standards for safety and health. Make sure that you hire a contractor that understands he or she will not receive payment upfront and that they must follow a strict timeline. On the other hand, Fannie Mae’s HomeStyle program does not require you to hire a consultant to look at the work. Instead, the program only requires an inspection at the end of the project and an initial.



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