A Guide To Financing A Home Renovation

Dated: 12/02/2014

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A Guide to Financing a Home Renovation
Home improvement projects fall into categories. You have the do-it-yourself projects, like painting, wallpapering, and landscaping. You have the somewhat taxing weekend projects that stretch your limits, like replacing a countertop, upgrading fixtures or appliances, and redoing the flooring. Then, you have the major home renovation. The kind that takes place when you buy a fixer-upper or realize your house needs updates. Major home renovations are the remodels and upgrades that demand the assistance of a qualified contractor. They’re not weekend—or even weeklong—projects. They’re investments in increased home value. And they’re not cheap. The average American spends between $75,000 and $150,000 on home renovating. Most of us don’t just happen to have $100k lying around. So how does one finance a home renovation? Is there a right way and a wrong way?

Frequently Asked Home Renovation Questions

Before we discuss financing options, we will first cover some of the most frequently asked questions regarding renovation projects and financing:

Is it smarter to renovate before selling or after purchasing?

A: The answer depends on numerous factors. If a renovation does add value easily recouped in a sale, it’s probably worth remodeling before selling. If a renovation eats away finances better put into a new home in a better location, it’s probably smarter to sell. If you make a good sale without renovating, you may choose to buy a fixer-upper in a better location, in which case you’ll still need renovation financing.
Q: How much can I borrow?
A: Focus less on how much you can borrow, more on how much you will need. Your first action is to begin with an accurate project estimate. Potential lenders will insist on knowing specific figures before working with you. If you’ll be hiring a contractor, start with a firm bid broken into labor and material specifics. Add 10 percent to cover surprises. If you’ll be handing the majority of the work yourself, compile a detailed materials list with quantities, costs, and an accurate total. Don’t forget to include permit fees and equipment rentals. Add a 20 to 30 percent cushion just to be safe.
Q: Will my credit be a factor?
A: Yes, it will. In fact, your credit rating, loan-to-value ratio, and income will determine how much you can ultimately borrow. These same factors will weigh in on interest rate and loan length. Before applying for a renovation loan, you would do well to get your financial house in order.
Q: Is a renovation loan a second mortgage?
A: Chances are you already have a mortgage on your home. Because of this fact, any home improvement mortgage really is a second mortgage. It sounds scary, maybe even a little ominous, but consider this: A second mortgage usually costs less than refinancing, even when the rate on your existing mortgage is low.

Available Renovation Financing

Borrowing money for a new kitchen or addition used to be a gamble. You’d go to the bank, sit down with a loan officer, and hope for the best. Today, a great many financing options are at your disposal. For example, a mortgage broker can offer more than 200 different loan programs. And a broker is only one of many lenders eager to find a loan that fits your situation—even if your credit history is less than outstanding. Securing home renovation financing comes down to three vital actions:

Knowing how much money you will need and roughly how much you can get from the start.

2.      Narrowing your possible loan options down to the ones that match you needs and finances best.
3.      Concentrating on the lenders likeliest to provide the type of loan you need. Loan shopping usually starts with mainstream mortgages from banks, brokers, and credit unions. It’s likely your home will be used as collateral. It’s also likely the loan will be insured by either the Federal Housing Administration (FHA) or the Veterans Administration (VA). Some loans are bought from your lender by Fannie Mae and Freddie Mac. Often referred to as “A loans” from “A lenders,” these loans have one catch: You need “A credit” to get them.
FHA 203k Loans
If you’re serious about a home renovation or buying a fixer-upper, you should look into FHA 203k loans. The FHA does not provide actual mortgage funds. Instead, it provides lenders with insurance designed to protect against losses in the event of homeowner mortgage default. These loans are a solution for lenders and homeowners because they provide financing to people with less than flawless credit at lower rates with low risk. In our next article, we will discuss FHA 203k loans in detail. In the meantime, if you’re in the market for a house—whether selling or buying—contact us for local assistance in the Virginia Beach and Hampton Roads areas.
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Chenea Powell

Whether it is your first home or the home you plan to retire in, I will be there to ease the process every step of the way! I find great pleasure in helping people achieve their goals in real estate a....

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