Moving into your first home, or a new home in general, would almost always necessitate some work to make it fully yours. Renovations are an inevitable part of homeownership, and with some forethought, they may also be a part of your home financing bundle. Consider taking out the money upfront rather than spending years or using your hard-earned savings to tackle your initial renovation project.

Renovation loans come in a variety of shapes and sizes but read on to find out what they can look like and how they function.

What is a home renovation loan?

Renovation loans are the only form of loan that allows homeowners to borrow against the potential value of their house. Since lenders normally set rates based on the loan to value ratio, using the after renovation value often lets you get the best rate possible (more on this later).

A home renovation loan relies on one key element: the value of the home after renovation. To help determine how much a homeowner can borrow, renovation loans use a home’s estimated after-renovation value rather than its current home value. This allows homeowners to take credit for the rise in home value as soon as the renovation is completed.

It’s easy to become perplexed by this concept, considering that some “home improvement loans” are simply rebranded unsecured personal loans or credit cards that aren’t appropriate for most projects due to their high-interest rates, short terms, and small loan sizes. These so-called “home improvement loans” aren’t renovation loans at all.

Installing or upgrading heating and cooling systems, energy improvements, roofing, waterproofing, mold remediation, and other costs could be covered by home-renovation loans, in addition to desired enhancements, including a new kitchen or bathroom that may add value to the home. An appraisal for a home improvement loan may include up to 110 percent of the home’s after-improved value in certain cases. This is especially useful if the home requires deferred maintenance, such as a hot water heater that has one or two years left on its warranty.

You can create your dream home, but it comes with some risks. For one thing, home-renovation loans are typically more expensive than regular mortgages.



Everything you need to know to get a home renovation loan

1. Consider your timeline.

Renovation loans take an average of 35-45 days to close, which is the same as the timing for closing a standard purchase transaction. It is advisable to check with your loan officer to learn the average closing time for home-reno loans in your area so you can prepare.

>>More: Conventional loan requirements

2. You should understand the difference between FHA, conventional, and VA loans.

Depending on your credit, location, the scope of work, and where you are in your mortgage proceedings, there will be different loan options available to you. They can take many forms and can be made to work in your favor in many different ways.

Since borrowers usually only need to put down 3-4 percent, FHA loans are better for buyers with lower credit scores, and they frequently require private mortgage insurance.

For both appraiser-required and borrower-selected improvements, conventional renovation loans may be used in combination with conventional mortgages.

Eligible veterans may use a VA loan to pay for more expensive repairs than the home’s appraised value.

There are a variety of other choices besides these three traditional home-renovation loans, which differ depending on your location and circumstances.

Since not all lenders are federally or state-qualified to provide home-renovation loans, the best thing to do if you know this is what you want is to build a relationship with a loan officer and ask all of your questions before you find the right match for you.

Your mortgage credit score, work records, current debts, and local regulations all factor into loan qualification.

3. Be realistic with your budget.

It’s tempting to overlook maintenance in order to save money on your monthly payment, but you must consider the big picture. Nothing is more inconvenient than having to go back to your loan officer a year later to refinance another renovation loan because you were overconfident the first time. Clients who are interested in a home-renovation loan should attend homebuyer seminars, consider all expenses, and have a firm grasp on their budget to reduce the chance of unforeseen maintenance costs. When the closing process is over, you’ll have completed all of your renovations and unpacked all of your belongings. How much money do you want to have left in your account?

4. Consider all funding options.

Home renovation loans are a cost-effective way to renovate your home, but they are not the only choice. Consider the following scenario: The borrower would pay between $45 and $55 a month for every $10,000 in renovation costs applied to the loan. In comparison to a home equity line of credit (HELOC), which fluctuates with prime interest rates, home-renovation loans typically have a lower, fixed interest rate. If you can’t afford home repairs out of pocket and don’t want to use a reno loan, a HELOC is a decent option because it borrows against your current equity and is thus less expensive than a personal loan.

5. You have to use a licensed contractor for any structural, electrical, or plumbing renovations when using a home renovation loan.

You need this because, before the loan is repaid, the bank needs to make sure that its properties are properly maintained to avoid any losses or deterioration due to faulty renovations.

This means you won’t be able to enlist the help of your handyman friends unless they are licensed and insured in your state. Painting, hanging ceiling fans, and other minor improvements are the only exceptions. For tasks such as electrical work, French drains, HVAC, and so on, make sure to budget for a certified contractor.

6. You’ll need a feasibility study prior to having the home appraised.

A 203k consultant will come to your home and inspect it before you purchase it for about $300 — but this will vary depending on your location. Before you get your formal appraisal, they’ll send you a third-party estimate of both required and suggested renovations.

You’ll have to pay this out-of-pocket charge, but in the long run, you may be protecting yourself from expensive surprises down the road. A feasibility analysis will help you decide if your vision matches the amount of loan you’ll be eligible for and whether you’ll be able to complete the purchase.

Are home-renovation loans worth it?

Making improvements or necessary repairs to your home may also be a smart investment, increasing its resale value significantly (not to mention its comfort, style, and looks). Unfortunately, many people are unable to afford large property improvements without the assistance of a home improvement loan.

Whatever mission you want to undertake, it will almost certainly not be inexpensive: In the United States, the average kitchen remodel costs more than $23,000. The estimated cost of a bathroom can be about $21,000. Even a basic 16 x 20-foot wood deck will cost upwards of $14,000.Although reno loans have the potential to provide fast equity, they are not without risk. Home renovation loans are a good choice for people who have some design experience, technological expertise, and, most importantly, patience.

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