The Den: Expert Insights on Renovation Loans with Trey Perry

The Den: Expert Insights on Renovation Loans with Trey Perry

In this episode, we discuss the power of renovation loans and how they can help buyers find and transform their dream home, even in a competitive housing market. Trey Perry, a renovation loan specialist with Movement Mortgage, shares his expertise on this often overlooked mortgage product that can unlock a wealth of inventory for homebuyers.

Table of Contents

What is a Renovation Loan?

A renovation loan is a powerful financial tool that can help buyers purchase or refinance a home while also financing the necessary repairs, changes, and upgrades. This type of loan is particularly beneficial for those who find homes that need work or for sellers who are unwilling to make repairs.

Essentially, a renovation loan is a single loan that serves two purposes. It allows you to buy or refinance a property and simultaneously finance the costs of renovations. These renovations can include anything from essential repairs to desired upgrades. This type of loan can be a game-changer for buyers who are frustrated with the limited inventory of move-in-ready homes and are open to the idea of customizing a house to fit their needs.

When you apply for a renovation loan, you'll go through the typical mortgage approval process, which includes providing pay stubs, bank statements, and W2s. However, you'll also need to work with a general contractor to get an estimate for the renovation work. This estimate is then given to an appraiser who will determine the future value of the home post-renovation. The funds for the renovation are held in an escrow account managed by the lender, and the contractor is paid in increments as the work is completed and approved.

This loan product is similar to a construction loan but is focused on existing homes rather than building from the ground up. It provides the flexibility to overbid on homes in competitive markets and includes the cost of making the home truly yours.

The Different Types of Homes Buyers Face

When navigating the housing market, buyers typically encounter a few different types of homes, each with its own set of challenges and benefits. Understanding these can help in making an informed decision.

First, there are new construction homes. These homes are usually more expensive and are often built on smaller lots with fewer trees and less character. While they offer the advantage of being move-in ready, they may not provide the charm or location that some buyers desire.

Next, we have what I like to call "cream puff" homes. These are well-maintained, updated properties that are often in high demand. They sell quickly, usually above the asking price, making them highly competitive and sometimes unattainable for many buyers.

Then, there are flipped homes. These homes have been purchased and renovated by investors. While they may look appealing on the surface, they often come with hidden issues. Flippers tend to focus on cosmetic updates like paint and carpet, but they may neglect essential repairs such as roofing, HVAC systems, or water heaters. Additionally, flippers often avoid providing full property disclosures, leaving buyers in the dark about potential problems.

Finally, there are fixer-uppers. These homes require significant work and are often overlooked by buyers who want something move-in ready. However, with a renovation loan, these homes can become an attractive option. Buyers can finance the purchase and the necessary renovations, transforming a fixer-upper into their dream home.

Each type of home has its pros and cons, but a renovation loan can open up possibilities that might otherwise be overlooked. It allows buyers to customize a home to their liking, addressing both cosmetic and structural issues, and ultimately creating a space that truly feels like their own.

How Does a Renovation Loan Work?

Understanding how a renovation loan works can alleviate many concerns and make the process seem less daunting.

None of the work needs to be done before closing. This allows both buyers and sellers to negotiate more aggressively, knowing that the necessary repairs will be covered by the renovation loan. The condition of the house doesn't matter as much because the renovation loan will finance the needed upgrades.

When you apply for a renovation loan, the process is similar to a traditional mortgage. You'll provide pay stubs, bank statements, and W2s. However, you'll also need to work with a general contractor to get an estimate for the renovation work. This estimate is then given to an appraiser who will determine the future value of the home post-renovation.

The funds for the renovation are held in an escrow account managed by the lender. The contractor is paid in increments as the work is completed and approved. This ensures that the work is done to the lender's standards and provides a level of security for the homeowner.

It's important to note that the combined loan amount—purchase price plus renovation costs—will determine your down payment and loan terms. For example, if you're pre-approved for $400,000 and find a home for $300,000 that needs $50,000 in renovations, your loan will be based on the combined amount of $350,000.

Renovation loans are amortized over 30 years, making the additional costs more manageable. This long-term financing option can be more attractive compared to using high-interest credit cards for home improvements.

Addressing Concerns About Renovation Loans

Despite the benefits, many people have concerns about renovation loans. Let's address some of these common worries.

One major concern is the perception that renovation loans take longer to close. While it's true that these loans can take longer than traditional mortgages, the difference is often minimal. For instance, Movement Mortgage's average turnaround for renovation loans is 33 days, only three days longer than a conventional loan.

Another concern is the horror stories about renovation loans that never close or contractors who don't deliver. To mitigate these risks, Movement Mortgage validates and approves contractors. This process ensures that only qualified professionals are handling your renovations, reducing the likelihood of issues.

The key to a smooth renovation loan process is securing a reliable contractor as early as possible. Each state has different requirements for contractors, so it's essential to understand these regulations to avoid delays. For example, in Tennessee, contractors are categorized based on the scope of work they can perform, while in North Carolina, a handyman can handle projects under $30,000.

Many people also worry about the increased down payment and monthly payments. However, it's crucial to remember that the renovation costs are spread out over 30 years, making the additional expense more manageable. The misconception is that financing $50,000 in renovations will drastically increase monthly payments, but in reality, the impact is much smaller.

Lastly, some loan officers avoid renovation loans due to the perceived complexity and potential for issues. However, companies like Movement Mortgage have specialized departments, known as "Renovation Nation," dedicated to handling these loans. This specialization ensures a smoother process and allows loan officers to focus on their primary responsibilities without getting bogged down in the details of renovation financing.

In conclusion, while renovation loans may seem complex, understanding the process and addressing common concerns can make them a viable option for many homebuyers. By working with experienced professionals and securing a qualified contractor early, you can transform a fixer-upper into your dream home with minimal hassle.

The Renovation Loan Process and Requirements

Understanding the renovation loan process and its requirements can help demystify this powerful financial tool.

When you apply for a renovation loan, the initial steps are similar to a traditional mortgage. You'll need to provide the usual documentation, such as pay stubs, bank statements, and W2s. However, an additional step involves working with a general contractor to get an estimate for the renovation work. This estimate is critical as it helps the appraiser determine the future value of the home post-renovation.

The funds for the renovation are held in an escrow account managed by the lender. The contractor is paid in increments as the work is completed and approved. This ensures that the work is done to the lender's standards and provides a level of security for the homeowner.

It's important to note that the combined loan amount—purchase price plus renovation costs—will determine your down payment and loan terms. For example, if you're pre-approved for $400,000 and find a home for $300,000 that needs $50,000 in renovations, your loan will be based on the combined amount of $350,000.

Renovation loans are amortized over 30 years, making the additional costs more manageable. This long-term financing option can be more attractive compared to using high-interest credit cards for home improvements.

One crucial element in the renovation loan process is securing a reliable contractor early. Each state has different requirements for contractors, so it's essential to understand these regulations to avoid delays. For example, in Tennessee, contractors are categorized based on the scope of work they can perform, while in North Carolina, a handyman can handle projects under $30,000.

Renovation loans also include built-in contingencies to take care of any surprises that come along during the renovation process. This ensures that unexpected issues don't derail the project, providing peace of mind for both the buyer and the lender.

Renovation Loan Options for Different Buyer Types

Renovation loans offer various options tailored to different types of buyers, making it a versatile financial tool.

For first-time homebuyers, the Homestyle loan offers a 3% down payment option. This makes it easier for individuals who are entering the housing market for the first time to finance both the purchase and renovation of their home.

Traditional buyers can benefit from a 5% down Homestyle option, while those looking to purchase a second home, such as a vacation property, can take advantage of a 10% down Homestyle loan. This flexibility allows buyers to customize their financing based on their specific needs and goals.

For veterans, the VA renovation loan is an excellent option. It allows for up to $50,000 worth of cosmetic renovations while still offering 100% financing. This means that veterans can make necessary upgrades without needing a down payment, making homeownership more accessible.

USDA renovation loans are available for those who qualify for USDA financing and whose property is located in eligible rural areas. This loan allows for up to $75,000 in renovations and even includes options for structural work. This makes it an attractive option for buyers looking to purchase homes in rural areas that may need significant upgrades.

Investors also have options with renovation loans. The Homestyle loan offers an investment product that can be used to finance the purchase and renovation of rental properties. This is particularly beneficial for investors who have the down payment but lack the additional funds needed for renovations. By including the renovation costs in the loan, investors can quickly make the necessary upgrades and start generating rental income.

Renovation loans are not limited to just primary residences. They can also be used for second homes and investment properties, offering a wide range of possibilities for different types of buyers.

In conclusion, renovation loans are a versatile and powerful financial tool that can help various types of buyers achieve their homeownership and investment goals. By understanding the different options available and working with experienced professionals, buyers can transform properties into their dream homes or profitable investments.

Renovation Loans for Refinancing and Investment Properties

Renovation loans are not just for purchasing a new home; they can also be a valuable tool for refinancing and investment properties. This flexibility makes them a versatile option for a variety of financial situations.

For homeowners looking to refinance, a renovation loan can be particularly beneficial. Unlike a traditional cash-out refinance or a home equity line of credit, which are based on the current as-is value of the home, a renovation loan considers the after-improved value. This allows homeowners to access more equity, providing additional funds for necessary upgrades and repairs.

This can be especially advantageous for those who have lived in their homes for an extended period and are looking to modernize or make significant improvements. By financing these improvements over the long term, homeowners can make substantial changes without a significant immediate financial impact.

Investors can also benefit from renovation loans, particularly when purchasing rental properties. The Homestyle loan offers an investment product that can be used to finance both the purchase and renovation of rental properties. This allows investors to make necessary upgrades quickly and start generating rental income sooner.

By including renovation costs in the loan, investors can leverage their down payment to cover both the purchase and the improvements. This can be an attractive option for those who have the down payment but lack the additional funds needed for extensive renovations.

Renovation loans provide a unique opportunity for refinancing and investment properties, allowing both homeowners and investors to maximize their financial potential and achieve their real estate goals.

Renovation Loan Advantages for Sellers

For sellers, renovation loans can offer several advantages that can make their property more attractive to potential buyers. This can be a game-changer in a competitive market.

One of the primary benefits is that it allows sellers to market their home as a renovation possibility. This can shift the focus from the home's current condition to its potential, helping buyers envision what the property could become with the right upgrades.

When buyers see the potential for renovation, they are less likely to focus on how much they need to lower their offer to cover the cost of repairs. Instead, they can see the value in making those improvements through a renovation loan, which can be financed over the long term.

This approach can prevent lowball offers that are often based on the perceived cost of necessary repairs. By highlighting the potential for renovation, sellers can maintain a higher asking price and attract more serious buyers who are interested in customizing the home to their liking.

Additionally, renovation loans can help sellers avoid the need to make repairs before listing the property. This can be particularly beneficial for those who may not have the time or resources to complete these repairs themselves. Instead, they can market the home with the potential for renovation, making it more appealing to buyers who are willing to take on those projects.

For real estate agents, promoting a property with renovation loan options can be a powerful marketing tool. It allows them to present the property in a more favorable light and attract a wider range of buyers. By providing potential buyers with information about renovation loan options, agents can help them see the possibilities and make a more informed decision.

In summary, renovation loans offer significant advantages for sellers by shifting the focus from the current condition of the home to its potential. This can help maintain a higher asking price, attract more serious buyers, and provide a more appealing marketing strategy for real estate agents.

Renovation Loans for Aging in Place and Accessory Dwelling Units

Renovation loans are not just for making a home more appealing to potential buyers; they can also be a crucial tool for those looking to stay in their current homes or add additional living spaces.

The concept of "aging in place" is becoming increasingly popular, especially among Baby Boomers. A significant percentage of this demographic wants to stay in their homes as they age. However, many of these homes lack the necessary modifications to make this feasible. Renovation loans can fund essential upgrades like wider doorways, ramps, walk-in showers, and lower cabinets, ensuring the home is safe and comfortable for aging homeowners.

Accessory Dwelling Units (ADUs), also known as mother-in-law suites, are another excellent use of renovation loans. These units can be added to existing properties to provide additional living space for family members or as a rental unit for extra income. The flexibility of renovation loans makes it possible to finance these additions, enhancing both the functionality and value of the property.

By utilizing renovation loans for these purposes, homeowners can not only improve their quality of life but also increase the market value of their homes. This makes it a win-win situation for those looking to stay put and for those considering future resale.

Getting Started with a Renovation Loan

It all starts with a conversation with the right people.  If you're interested in finding out more about Renovation Loans and what product might be the best fit for you, give Vicki Williams or Trey Perry a call. 

Check out our podcast with Vicki Williams

In conclusion, renovation loans offer a versatile and powerful financial tool for various needs, whether you’re looking to purchase a fixer-upper, make essential home upgrades, or add an accessory dwelling unit. By understanding the process and working with experienced professionals, you can transform your property into your dream home or a profitable investment.

 

Also Available On

Apple Podcast Logo Spotify Podcast Logo Amazon Music Logo 

Post a Comment