Shopping for a new home can be a lot of fun. You get to walk through different houses, pointing out the strengths and weaknesses of each. You ooh and ah over the crown moulding, wainscoting, and granite countertops, and laugh at some of the strange design decisions that previous homeowners chose.
Unless you’ve hired trusted home builders to build your home from the ground up, you’ll rarely find the perfect house in which you wouldn’t change a single thing. If you’re a fan of HGTV and other home renovation channels, you probably have some lofty ideas about how to improve a home in order to make it your own. You might even feel ready for the challenge of taking on a complete fixer upper.
But before you dive into the design and building process, find out if you have the funding necessary to make improvements. Unless you have savings earmarked for this renovation plan, you might run into some obstacles in finding funding.
Mortgage lender rules
Many homebuyers assume that they can add the cost of their renovation to their mortgage, taking out a larger sum than the house is worth. However, you must defer to your lender on this matter. Most traditional lenders will not lend very much extra money with your mortgage loans.
Lender rules on this matter will differ, so call your lender and ask about their policies before picking out new flooring or kitchen appliances. Usually, they’ll tell you that they’ll finance up to 100 or 105 percent of the home’s value. So, if it was appraised at $200,000, but you purchased it at $175,000, you can ask for the difference and maybe a little extra to make updates.
However, if you buy the property at the value it was appraised at, your bank probably won’t lend you any extra money to make improvements. They want to protect their investment, and there’s no guarantee that you’ll use the money to add value to the property, like adding energy efficient windows or putting on a new roof.
Other lenders are more giving
Although traditional lenders tend to be pretty strict with their mortgage policies, there are other lenders and programs that will support additional renovation costs when you take out your mortgage. According to Bankrate, these options are as follows:
Fannie Mae’s HomeStyle Loan: You can buy a place that needs repairs or you can refinance your existing home with a new loan that has extra funds to finance your renovation. You’ll need at least 5 percent of the purchase price and a certified contractor must do the work on the home.
FHA 203(k) Loans: The Federal Housing Administration (FHA) loan programs make it easier for homebuyers with low credit or little savings to buy a home that needs refinanced. You only need 3.5 percent for a downpayment, and with a qualified 203(k) consultant, you can be granted funds to finish your renovation.
Home Equity Loan or Home Equity Line of Credit (HELOC): If you have an existing mortgage and you’ve been building equity into your home for some time, you can use the equity built into it to fund your renovation. The risk is that you’re putting your home up as collateral, so you risk losing the house if you don’t make your payments. However, it can be a great way to fund a renovation if you have a good history of paying your bills.
In short, there are options to add your home renovation to your existing mortgage, but you have to do it the right way. Consider all your choices and work with your lender to come up with a plan that’s mutually beneficial.
