Home improvement loan options
With the many options available for home renovations or complete rehabs, there’s no reason why you haven’t already taken a sledgehammer to that plaster (or damaged drywall). While the demo is definitely the worst part of any remodel or renovation project, the results are worth the pain – you know it’s true.
Aside from the dust, another challenging part of home renovation is the cost involved. Let’s take a look at some renovation options:
The secret lies in knowing the available loan programs that allow you to borrow your current equity or borrow against your future value. Yes, you can borrow against your future value.
Fannie Mae HomeStyle Renovation Loan
HomeStyle is Fannie Mae’s version of a construction loan, with flexible down payment requirements and lending guidelines. Whether you’re purchasing or refinancing, HomeStyle is a cost-effective way to renovate or rebuild. Also, if you’re dealing with a home that does not meet your lender’s habitability standards then HomeStyle is one way to complete both the purchase and repairs with one loan.
Tip: HomeStyle allows you to borrow against the future value of your home.
FHA 203k Loan
The Federal Housing Administration’s (FHA) 203(k) loan offers less rigid credit requirements, competitive rates and a low down-payment requirement. Many times construction loans are not a financially viable option as they can be very expensive.
The FHA offers two types of 203k renovation loans, Limited 203k and full 203k.
Full 203k for Larger Projects
The full 203k can assist you with larger scale projects from the complete reconstruction of a home to the rehabilitation of a home. To be eligible, repairs must exceed $5,000.
Limited 203k for Smaller Projects
The Limited 203k is a repair loan with no minimum repair requirement. The Limited option allows you to repair and/or improve your home without depleting your savings. The program allows for up to $35,000 in repairs (this limit includes fees and reserves) and does not require the use of plans, engineers and/or architects.
Tip: 203(k) allows you to borrow against the future value of your home.
Home Equity Line of Credit
Home Equity Lines of Credit (HELOCs) are another option when considering home renovations. While you’ll need to currently own a home, a HELOC can be an affordable and flexible financing method when renovating.
The greatest barrier to obtaining HELOCs will be more stringent approval requirements, mainly driven by credit score and the amount of equity in your home. Additionally, most lenders who offer second mortgages will limit the amount of your equity line to 80 percent of the value of your home – this 80 percent includes your first mortgage amount as well.
Tip: HELOCs limit you to borrowing against the current value of your home.
Pulling equity out of your home to complete home renovations can be a sound option provided that you are able to take advantage of the best rates. The best rates are typically reserved for those with a 60 percent loan-to-value or less (i.e., what your home is worth versus what you owe) and at least a 740 credit score.
If the rate is not your main concern, lenders will allow you to take up to 85 percent of your equity. However, keep in mind, if your loan-to-value is over 80 percent you’ll be forced to pay monthly mortgage insurance.
Tip: A cash-out refinance will limit you to borrowing against the current value of your home.
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