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Remodeling financing

Several options are available for construction financing. The first option is a new first mortgage intended for rehabilitation finance – the programs are called HomeStyle and 203k, are offered by Fannie Mae and FHA, respectively, and allow up to 97% of the as-completed value of your home in total financing. The benefits to these programs are that you can do one loan instead of two, they are 30-year fixed loans, and potentially provide for all of the rehab funds that you will need.

The second option is a construction line of credit. With a construction line of credit you can keep your existing first mortgage and add a credit line for the improvements. The benefit with a construction line of credit is that it uses the as-completed value of your home. The disadvantage is that it has to be refinanced when the construction is done.

The third option is a home equity line of credit. The benefit to a home equity line of credit  is that you can keep your first mortgage as-is. The disadvantage is that the interest rate is variable, and the current amount of equity is all that is available to borrow.

It might be helpful to get the details of your existing mortgage together with the amount of improvements that you want to make and then we can put figures to this.

As-completed value compared to current value

The as-completed value is an estimation that an appraiser will make based upon the improvements intended for your home. When an appraiser does an as-if appraisal based on an as-completed value, he or she will want to see a bid from a contractor detailing the improvements that will be made. The appraised value that is calculated is then based upon the physical attributes of your property with the to-be-completed repairs included compared to other homes in the area that have sold recently. If the as-if value supports the improvements that are going to be made then financing is available for the project as long as other qualifying criteria are met (credit, income, etc). An example of a repair/improvement that drives value is a kitchen remodel. A repair that doesn’t necessarily drive value is painting to change the color of the property. The appraiser is looking for material changes to the property that drive value. The current value of the property is determined without any of the potential improvements being completed.

Fannie Mae Homestyle

This program allows for financing of renovation/repair funds. The loan amount can be up to 97% of the as-completed value. The financed repair costs cannot exceed 75% of the as-completed value. What this means is the loan program can be used to purchase or refinance a home and include funds to complete the purchase or pay off an existing mortgage.

Here are some commonly asked questions on details:

https://www.fanniemae.com/content/faq/homestyle-renovation-faqs.pdf

The benefit to Homestyle over the FHA 203k program is that mortgage insurance is not required if the amount of financing doesn’t exceed 80% of the as-completed value. If mortgage insurance is required (loan amount > 80% of value), then it comes with options.

Fannie Mae loan limits apply (currently $453,100 for a single family home in MN), and the application must gain approval through the Fannie Mae automated underwriting system. Contact us for details on what we need to submit the application.

FHA 203(k)

FHA has two programs under the 203k umbrella. The 203k Full allows for major remodels that include structural changes (additions, tearing down walls, etc). The 203k Limited does not allow for structural changes, but includes the ability to finance most other types of repairs/improvements.

FHA 203k Limited allows for up to $35,000 in included financing for repairs. Some of this goes towards construction inspection costs, title updates and potentially permits (unless the contractor obtains them). This amount also needs to cover the contingency reserve, determined by the age of the property, and is generally 10-20% of the repair estimate. We advise keeping the contractor bid below $27,000 if you plan to finance all of it.

FHA 203k Full allows for up to $100,000 in repair costs, again including inspection/title and contingency reserves, but also including the cost for a HUD inspector/project manager.

FHA loan limits apply for these programs, currently $356,500 in MN for a single family home (higher for multi-unit homes) and FHA underwriting applies. Contact us for details on what is needed for approval.

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