If you’re looking to purchase a new home but are struggling to find one you can afford, you’re not alone. Across the country, inventory is low and bidding wars are the norm. In the hottest markets (Austin, Phoenix, Nashville), homes are listed for a week or less before they have more than a dozen offers all for more than asking price. Getting your offer accepted is like winning the housing lottery.
Rather than giving up on your dream to get a new house, try switching tactics instead. There’s a mortgage trick savvy home buyers have used for years to get a beautiful home: renovation loans. Think of it this way… We’re all seen dated and odd houses sit on the market while turn-key houses fly off the shelves. Why not purchasing that ugly house and remodel it into a home that works for you?
Home renovation loans work a little like a conventional mortgage, except the cost of renovating the home is tacked onto the loan. So rather than taking out a loan for the purchase price, you take out a loan for the purchase price plus the renovation budget.
How much might extra might a renovation cost? These top renovation projects give you a quick idea of what homeowners paid in 2020, according to HomeAdvisor:
- Home addition ($52,157)
- Inground pool ($49,245)
- Kitchen remodel ($35,317)
- New exterior siding ($13,974)
- Bathroom remodel ($13,401)
- New roof ($9,375)
- New windows ($9,131)
- New cabinets/countertops ($5,832)
- New flooring ($4,680)
- Decking and porches ($3,291)
Homeowners looking to finance a remodel have two options: FHA 203K loan or Fannie Mae’s HomeStyle Renovation loan. Each is a great option, so let’s break them down.
FHA’s 203K remodel loan
This is a great option for families in low-to moderate-income brackets It’s a loan provided by FHA (Federal Housing Administration). It provides a minimum of $5,000 for renovations and major structural repairs. The kicker is you have to hire a HUD consultant to oversee the project and the money can only be used for:
- Structural alterations and reconstruction
- modernization and improvements to the home’s function
- Elimination of health and safety standards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing
- Installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding and replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements
Even with those restrictions, it’s a great loan if you’re eligible. Qualifications for getting the 203k Renovation Loan is similar to getting a FHA loan.
Fannie Mae’s HomeStyle Renovation loan
These renovation loans are available through Fannie Mae and don’t have restrictions like the 203k FHA loan. You can use the funds for virtually anything you want. Add a tennis court, an inground pool, an over-the-top fountain – and you can do it to both your primary residence as well as a secondary vacation or investor home. The improvement has just two requirements in order to be eligible:
- It must be permanently affixed to the property
- It must add value to the property
This loan has a lot of possibilities for new purchasers, investors, and secondary home buyers. It’s an opportunity to purchase and renovate a home to gain quick equity.
Refinance and renovate the home you’re in
If you can’t purchase the home you want, consider refinancing with a renovation loan and make your current home the one you want. Renovation loans are available for the initial purchase of the property or when refinancing. Doing it now while rates are low may be a smart move for some homeowners.
If you’re open to getting a fixer-upper home and renovate it, reach out to your local Mann Mortgage lender. Together, you can talk about the market in your area, what you’d qualify for, and they can even recommend a builder to work with.
