At some point, we’ve all watched those shows on TV where someone buys a home and renovates it or takes their existing home and gives it an extensive makeover. They do what many of us would love to do if we only had the budget.
If you’re interested in buying or refinancing your home and renovating it to better fit your needs, Quicken Loans® has the perfect product for you: the Restyle Renovation LoanSM. Below, we’ll talk about the benefits of a renovation loan. But before this, let’s briefly get back to the basics.
What’s A Renovation Loan?
Like any mortgage, a renovation loan first provides funds to buy or refinance your house. The kicker here is that you also get additional funds to do any renovations you want, including conditions or repairs that will add to your property value.
Renovation loans aren’t new. Other than the conventional loan option from Quicken Loans, the FHA has a program known as FHA 203(k). While you can purchase or refi and then renovate a home with an FHA 203(k) loan, this option does come with drawbacks.
One major downside of a 203(k) loan is a limitation on luxury items. This means you can be prevented from using the funds to do something like put in a swimming pool. You also have a quick turnaround, with all projects completed by 6 months after closing.
So now that we’ve looked at what types of renovation loans are out there, what does Quicken Loans have to offer?
What’s The Restyle Renovation LoanSM?
The Restyle Renovation LoanSM from Quicken Loans is a conventional product. With that distinction comes several advantages.
To begin with, there are less restrictions on what you can do in your remodel. As long as improvements are affixed to your property, you’re only limited by your imagination. You can add accessory units, garages, rec rooms, swimming pools and more. There’s even the ability to pay for appliances with financed funds if you’re remodeling your kitchen or utility room.
A Restyle Renovation LoanSM can be used to lower your interest rate and/or change your term, but homeowners can’tuse this to take cash out. The extra funds you’re financing are only for renovation.
Who Qualifies For This Loan Option?
A Restyle Renovation LoanSM can be used to purchase or refi more homes than a typical FHA 203(k) loan, the latter of which can only be used to renovate primary properties. Because it’s a conventional loan, it can be used to renovate second homes and one-unit investment properties as well.
There are no special requirements put in place because it’s a renovation loan. Standard conventional loan requirements apply.
Among other things, this means your down payment may be as low as 3% – 5% of the purchase price plus the renovation amount for a one-unit primary residence. If you’re renting out other units within your primary residence, the down payment will be higher and based on the number of units you have. Second homes would require a 10% down payment and purchasing a one-unit investment property would be 15%.
The primary advantage of this loan is that you’re able to get renovation projects done even if you have minimal equity.
Since it’s a conventional loan, you need a minimum median FICO® Score of 620 or higher in order to qualify. You’ll also need to keep your debt-to-income ratio (DTI) no higher than around 43% for the best chance at qualification.
All standard property types are allowed. Various terms are available including 15, 20 and 30-year options. In addition, you can get a fixed-rate mortgage with this type of loan.
How Much Can You Spend On Renovations?
In a regular transaction, your loan amount is based on the property value after accounting for the equity you have in the home or the down payment you made in a purchase situation. With a Restyle Renovation LoanSM, the goal is to raise the value of the property based on improvements that haven’tyet happened. So how do we determine how much you can spend? Let’s run through the way that this works and then discuss a quick example.
In a purchase situation, your loan amount is based on the lesser of the following:
- What the appraiser says your home will be worth after the renovation is completed
- Sum of the purchase price plus your renovation costs
In a refinance, your loan amount is based on the value the appraiser expects your property to have after renovations are complete.
Whether it’s a purchase or refinance, you can spend up to 75% of your loan amount on renovations. So if the appraiser said your home was going to be worth $400,000 post-renovation, you can spend up to $300,000.
If you can’t live in the home while work is being completed, you can finance up to 6 months’ worth of mortgage payments (including property taxes and homeowners insurance) into the loan as long as the home is being purchased or refinanced as a primary residence. In addition, you can finance fees including those of any inspections, appraisals, architects, engineers, title updatesand permits.
How Does The Renovation Work?
Because you’re having a renovation done and the work associated with the financing will be ongoing, it’s important to understand the process for your renovation loan. We’ve broken this down into steps:
- If you’re buying a home, find the home. If you’re doing a refi, you’ve got a leg up here and can skip ahead.
- Figure out what improvements or repairs you want made to your home. Those buying a home would probably have a signed purchase agreement at this point, but that’s not always the case.
- You’ll need to find a contractor and have them fill out a packet with material and labor estimates. They’ll also submit the plans for the renovation. The contractor will need to provide background information on their business including license and insurance information as well as a summary of finances and credit check. This should all be returned to Quicken Loans.
- Your loan closes and it’s time to start the renovation.
- We’ve partnered with Land Gorilla to handle logistics around the renovation process. After the loan closes, you and your contractor will get an email from them going over how the process works. This will include how your contractor can request to draw from available funds to get the work done as well as any conditions on those funds, such as inspections at various stages of the work.
- When the work is done, Land Gorilla will order the final inspection and the contractor gets the last check.
- If there are any leftover renovation funds, they get applied directly to the unpaid principal balance on your loan.
If this sounds like a good option for you, you can get started online or give one of our Home Loan Experts a call at (800) 785-4788. Feel free to leave any questions you have for us in the comments below.
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