Two Types of Renovation Loans
Sometimes, when searching for a house in Cedar Rapids, there’s nothing out there except for fixer-uppers. You can buy the house, but where do you get the money for improvements. According to Bankrate, “Many people don’t realize that there are two types of renovation loans that can help pay for your housing upgrades. Whether you need a new roof or your kitchen is outdated, there is a mortgage that’s right for your fixer-upper.”
With renovation loans, you can get one home loan that combines the purchase price with the cost of improvements. Here are your options and what you should know about each one.
Two Types of Renovation Loans
The two major types of renovation loans are the FHA 203(k) loan, insured by the Federal Housing Administration, and the HomeStyle loan, guaranteed by Fannie Mae. Both cover most home improvements, whether major or minor.
Both FHA 203(k) and HomeStyle can be used for structural and cosmetic renovations. With both loan types, renovation work may begin immediately after closing.
FHA’s 203(k) loan is for primary residence s only. It requires a minimum credit score of 500 with a down payment of at least 10 percent; a credit score of 580 or higher allows a down payment of 3.5 percent. These loans can’t be used for work that the FHA deems a luxury, such as installing a swimming pool.
There are two types of 203(k) renovation loans: limited and standard. The limited is for renovations costing $35,000 or less that don’t require major structural work. The standard is for projects upwards of $35,000 or involving major structural work.
A 203(k) standard loan requires a HUD consultant, who helps the homeowner solicit and analyze bids and oversees inspections of the work. Consultants are often contractors, architects or inspectors, McMullen says. HUD has a tool to search for consultants .
Fannie Mae’s HomeStyle loan may be used to buy and fix up a primary residence, second home or investment property. It requires a minimum credit score of 620. Minimum down payment is 3 percent or 5 percent, depending on whether the home is owner-occupied and the borrower is a first-time homebuyer or has a low to moderate income.
Pitfalls to Watch For.
The most common problem is failing to get detailed cost estimates. To prevent cost overruns, make sure estimates are specific about materials and include costs for inspections, permits and consultant fees (if applicable).Getting Started.
After finding the house you want, choose a lender, decide on a loan type and hire a HUD consultant. Then, with the consultant’s guidance, get estimates from contractors. Your lender will need copies of the estimates.The renovation work may begin immediately after you close the loan.
Using one of the two types of renovation loans, when the improvements are complete, you’ll have your home the way you want it — sooner than you might have thought possible.
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