Home renovation costs can be a significant investment, so is it possible to add renovation costs to your mortgage? The answer depends on the type of rehab you are doing. Renovations that are considered “improvements” will typically qualify for loan financing, which means you can borrow more than you need on your mortgage (or mortgage refinance) to include the costs of your renovations.
Conversely, a renovation that is not an improvement, such as installing new flooring in the kitchen or bathroom, may not be eligible for finance. If you are considering adding renovation costs to your mortgage, contact a mortgage broker today!
Get Approval For The Right Loan
Not all lenders allow you to add renovation costs to the loan. You must do research to identify what types of loans will allow you to add renovation costs, and then speak with various lenders about your loan needs to determine if this is possible for your situation. The following are some of the rehab loans that are available, alongside their pros and cons.
FHA 203(k) Loans
FHA 203(k) loans combine the cost of a home mortgage and your renovation costs into one single loan, which means you’ll only have to make one monthly repayment. The amount you can qualify for depends on the appraisal of your house.
Both an as-is value and an after-improvement value will be calculated, with the latter taking into consideration the planned repairs. The loan amount will be determined using the after-improvement value. Lenders will then release funds based on the schedule of construction.
There are two FHA 203(k) loan options: a Limited K loan, which is for minor renovations (not involving structural or foundation repairs), and a Standard K loan, which is for repair work that will cost more than $35,000 (often for extensive structural repairs).
With that in mind, you can use the FHA 203(k) loan for room additions, upgrades to improve energy efficiency, kitchen and bathroom upgrades, plumbing and electrical upgrades, roofing replacement, flooring replacement, insulation, disability improvement, landscape improvement, and more.
Pros and Cons
The following are the pros and cons of applying for an FHA 203(k) loan:
- Requires only a minimum 3.5% down payment
- You only need a minimum 620 credit score
- The maximum loan is 96.5 percent of the after-improved value
- The seller is allowed to contribute 6% of the purchase price
- Closing costs are low
- The loan is only for primary residences, making it less than ideal for investors
- Repair and renovation work cannot be DIY
- A significant amount of paperwork will be involved compared to other loans
Fannie Mae HomeStyle Renovation Loans
Like the FHA 203(k) loan, the Fannie Mae Homestyle Renovation Loan can cover the costs of repairs and renovations as well as the purchase or refinancing costs.
Homestyle Renovation Loans are beneficial for rehab investors because you can use them to fund almost any type of renovation work, including repairs, home upgrades, and updates, and even luxury upgrades. Like the FHA 203(k) loans, you will need to have the property and planned renovations appraised to qualify.
Pros and Cons
The following are some of the main pros and cons of the Fannie Mae HomeStyle Renovation Loans.
- Requires a minimum 3% down payment
- You only need 3% equity to refinance
- Combines purchase/refinance price with renovation costs into a single loan
- You can use it on investment properties
- No upfront mortgage insurance fee is required
- The interest rate tends to be higher, especially if you have low credit and higher debt
- Closing costs can be significant
- It can take longer to close on a HomeStyle Renovation Loan (in general)
- There is a conforming loan limit of $548,250 for single-unit properties
- The renovation costs are limited to 75% of the as-is value.
Freddie Mac Renovation Mortgage
Freddie Mac’s renovation loan is known as the CHOICERenovation Mortgage, and it was only recently launched this year. Their previous offering was known as their Renovation Mortgage. Freddie Mac launched their new renovation loan to compete with the FHA 203(k) and HomeStyle Renovation loans, and therefore it’s very similar to those rehab loans.
Pros and Cons
The following are the primary pros and cons of the Freddie Mac Renovation Mortgage:
- The loan can include both the home purchase and the renovation costs
- Down payment is as low as 3.5%
- You can use the CHOICERenovation Mortgage on investment properties
- Allows for super conforming mortgages, which means the loan amount can be high
- You can’t be in business with the seller, developer, or builder of the property you are buying and renovating
- The approval process can take a while, especially if you’re investing in a foreclosure or auction property
Hard Money Loans
A hard money loan is different from other types of rehab loans. First, the previous loans are all backed by the federal government, making them less of a risk for lenders. The lower risk means they are easier to qualify for (and accounts for the lower down payment and credit score requirements). Hard money loans have no such backing. Banks don’t even offer them—they’re typically only offered by businesses and individual lenders.
With a hard money loan, the property the loan is being used on is used as collateral. For instance, if you use a hard money loan to renovate a property you own but can’t make the payments, you may lose that property to the lender. However, hard money loans can be easier to secure, making them particularly attractive to real estate investors looking to flip fixer-uppers for a profit over the short term.
Pros and Cons
The following are some of the pros and cons of taking out a hard money loan:
- Requires low credit score requirements (often as low as 620)
- You can use it for uninhabitable properties that require extensive work
- Much faster approval time (often within days as opposed to weeks)
- No prepayment penalties
- Involves very high-interest rates due to the risk involved
- Larger down payments are required (often 20%)
- Loan terms are very short (often 12 months)
Investment Property Line of Credit (LOC)
A LOC is a pre-established amount of money that you can borrow. In real estate, you can secure a line of credit against the equity that you have in your property. There are two specific types of LOCs available to investors. The first is a single line of credit that you can secure using the equity in one of your investment properties. The other type allows you to take out a line of credit on a portfolio of investment properties.
Pros and Cons
Consider the following pros and cons of using a LOC:
- You can secure a significant sum of money with a portfolio LOC
- You only have to pay back what you use
- You can withdraw only what you need from your LOC at any given time
- You can use your LOC for anything
- You can pay off what you’ve used and still borrow from your LOC
- Interest rates are often low
- Having a LOC can help you boost your credit score
- You are using your home as collateral
- You need to have equity in your property (or properties) to secure a large LOC
- LOCs typically come with a variable interest rate
- You must have good credit to qualify
- You must be able to prove that you have the income needed to repay the loan
- Since you are borrowing against your equity, if home prices drop you may owe more than what the house is worth
How Can You Qualify For Rehab Loans?
Because there are several options available when it comes to financing a fix-and-flip investment, there are a few ways that you can qualify. However, to ensure that you have the most options, you should focus on the following:
- Improve your credit score: Make sure that you have a good credit score by paying your debts down and making your payments on time and in full.
- Do your research: Being able to show lenders how much renovations will cost and what kind of profit you expect to generate from making those renovations can help convince them to take a risk.
- Have reserve funds: In addition to a provable income, having money saved up will make lenders feel more at ease as you will be considered less likely to default on your loan.
- Have equity: If you have already bought the property that you are looking to rehab, having a large amount of equity in it gives you more to borrow against, which means you can take out a greater loan or LOC against your equity.
Get Quick and Easy Approval For A Rehab Loan Now!
Fix-and-flip investing can be very lucrative. Unfortunately, many lenders balk at large rehab loans (for various reasons). Even if they are likely to qualify you, the loan process can take weeks or even months to complete. If you need a loan fast, and are looking to secure an excellent deal, then you don’t have time to wait!
Here at Pine Financial Group, we offer rehab loans specifically for fix-and-flip investors. There are multiple advantages to securing financing through us instead of a traditional lender, as you can:
- Secure up to 100% financing on the home purchase, repairs, lender fees, and closing costs.
- Secure up to 70% of the property’s After Repair Value.
- Hold repair money in escrow and release it as rehab work is completed.
- Experience fast closings so that your deals aren’t held up.