How do you choose the best renovation loan?
Changes to your present home could be the path to your dream home. Or want to buy a home in desperate need of upgrades and repairs? Where do you get the money for renovations? Consider how much you want to borrow and what it is you want to change. It's hard to calculate the best home renovation mortgage for your needs, so working with an experienced loan officer is key to picking the right program for your individual requirements.
Fannie Mae’s HomeStyle Loans
One of the best-known loans for home improvements, Fannie Mae’s HomeStyle Renovation loan, allows borrowers to either buy a place that needs repairs or refinance their existing home loan to pay for improvements. The HomeStyle loan is available from any Fannie Mae-approved lender, but there are qualification requirements
Make a down payment of at least 5 percent of the purchase price of the home;
A certified contractor must prepare and submit a cost estimate and details of the work to be done;
One advantage of a HomeStyle loan is that it’s just one loan; you don’t have to take out a loan for the mortgage and then another loan for home repairs. One loan reduces paperwork and closing costs;
Money for the home improvements goes into a separate escrow account that’s used to pay the contractor directly. You don’t have access to those funds like you do with; and
a home equity loan or a cash-out refinance.
FHA 203(k) Loans
The Federal Housing Administration offers a home renovation loan called a 203(k). There’s typically a lower credit-score requirement for this loan than there is for a HomeStyle loan, and a lower minimum down payment of 3.5 percent.
There are different types of FHA 203(k) loans:
Limited, formerly called streamline;
Purchase or Refinance.
A limited FHA 203(k) loan is designed for cosmetic improvements and is capped at $35,000. A standard FHA 203(k) loan can be used for extensive remodeling, but it requires you to hire a qualified 203(k) consultant to oversee every step of the work, from the plans to the finished product. An FHA 203(k) might be best for a borrower with so-so credit and little money to pay down since borrowers can get a mortgage with only 3.5 percent down.
Home Equity Loans
Another way to finance your home renovation is by taking out a home equity loan, also known as a second mortgage. This is a one-time loan, so it’s not subject to fluctuating interest rates, and monthly payments remain the same for the loan term. A similar loan is the home equity line of credit, or HELOC. It has a revolving balance and might be best for someone who has several large payments due over time, like with a big home improvement project. With either option, you’re pledging your home as collateral, meaning if you don’t make your payments, the lender will end up owning your house. Alternatively, you can take out
an unsecured personal loan to avoid putting up your home as collateral.