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What is a renovation loan?

A renovation loan is a first lien mortgage that allows you to purchase or refinance a home and finance repairs. One loan, one monthly payment.

There are many types of renovation loans, including conventional, FHA, USDA, VA, and portfolio loans.

What may be financed?

Renovation costs that may be financed include labor and materials from a contractor’s bid, architectural and engineering fees, Consultant fees, draw inspection fees, title update fees, and draw management fees.

Contingency reserves may also be financed and – in some cases – a mortgage payment reserve.

On refinances and USDA purchases, typical closing costs and pre-paid items (e.g., homeowner’s insurance, property taxes, escrow deposits for taxes and insurance, pre-paid interest, etc.) may also be financed enough there is enough home equity to do so.

What are contingency reserves and mortgage payment reserves?

Contingency reserves are designed as a cushion for unforeseen or unexpected repairs uncovered during renovation. The amount of financed contingency reserves varies and they may or may not be used for discretionary purposes, depending on the loan type. In most cases, any funds left over in contingency are applied as a principal reduction once the project has been completed. But if you elect to self-fund your own contingency reserves and there are funds left over, those may be refunded back to you.

On some renovation loans, a mortgage payment reserve may be financed to cover mortgage payments for up to six (6) months. This option is available in cases where a property will remain uninhabitable for a period of time during renovation.

What are the typical closing costs?

Renovation loans have closing costs like other mortgage transactions, including loan underwriting/processing fees, title insurance, recording fees, appraisal fees and other costs. One of my main goals is to find a cost-effective solution for your renovation project. After you have applied for your loan, you will be provided a closing cost estimate (i.e., Loan Estimate) specific to your transaction.

Can I use a renovation loan if my home has been damaged by a natural disaster?

Many properties in need of extensive repairs, such as those damaged by a natural disaster, will not qualify for traditional financing.

If homeowner’s insurance will not cover the damage and cash is not an option, renovation loans may be used to refinance a property and finance repairs or improvements.

How do I calculate my down payment?

FHA requires a minimum of 3.5% down. On an FHA 203(k) loan, the minimum down payment required would be 3.5% of the purchase price plus total renovation costs.

Fannie Mae® requires a minimum of 5% down in most cases. If you are a first-time homebuyer, you may be able to put down as little as 3%. Contact me for more information. The minimum required down payment would be 3-5% of the purchase price plus total renovation costs.

USDA offers 0% down financing options for home buyers of properties located within a USDA Eligible Area. In cases where the appraised value of the property exceeds the purchase price, USDA offers the unique ability to roll closing costs and pre-paids into the loan.

Can I use a renovation loan to add a home office or personal gym?

Yes! If you are planning a remodel to accommodate your new work-from-home or work-out-from-home lifestyle, renovation loans may be a great solution.

While home equity lines of credit and cash-out refinances may be an option for financing some home improvement projects, renovation loans allow homeowners to borrow against the future value of their homes with higher loan-to-value allowances than other forms of mortgage financing.

Can I choose which repairs to finance into my loan?

Yes, as long as they are eligible repairs allowed by HUD on FHA 203(k) loans, Fannie Mae® on conventional renovation loans, or USDA on USDA renovation loans.

As a general rule of thumb, HUD/FHA and USDA do not allow luxury improvements.

What types of properties are eligible for renovation financing?

Most 1-4 unit properties are eligible for renovation financing, as long as the owner intends to reside in one of the units. These include historical homes, modular homes, homes in a Planned Unit Development (PUD), and townhomes. Some condos may be eligible. Contact me for more information.

On conventional renovation loans, unfinished new construction homes may be allowed as long as they are at least 90% completed.

Second homes are allowed on conventional renovation loans.

Multi-unit homes are not allowed on USDA renovation loans

Manufactured homes are not allowed.

How long does it take to close?

It generally takes about sixty (60) days to close a renovation loan. Oftentimes, the most lengthy task centers around your ability to find a contractor and obtain a bid.

Can I hire any contractor I would like?

You are responsible for selecting the contractor you wish to hire, but the contractor must meet all local and state requirements to perform the work. We will confirm they carry the proper liability insurance coverage and Worker’s Compensation coverage (if applicable). We will also confirm they hold any licenses or certifications required.

On FHA 203(k) loans, you may not be related to the contractor and the contractor may not be related to any other party to the transaction.

Can I do the work myself?

Self-help or Do-It-Yourself (DIY) repairs may be allowed on some loan programs. Each program has specific requirements. Where self-help is allowed, you must meet all of the typical contractor requirements (e.g., experience, licensing, liability insurance and Worker’s Compensation coverage, etc.). Contact me to discuss whether or not you can do the work.

Self-help or Do-It-Yourself (DIY) repair work is not allowed on USDA renovation loans.

Can I make changes to the work during renovation?

On FHA 203(k) or USDA renovation loans, this is generally not allowed. The work as outlined in the bid needs to be performed after closing by the contractor who provided the bid during the loan process. If a health or safety issue arises during renovation, discuss the situation with Diamond Residential Mortgage Corporation.

On HomeStyle® Renovation loans, you may be able to make minor changes to the scope of work. Clear any changes to the scope of work with Diamond Residential Mortgage Corporation first, otherwise, you may not be reimbursed for the extra costs.

If I'm unhappy with my contractor, can I fire them?

You may terminate your contract with the contractor under certain circumstances. Before you do so, discuss the situation with Diamond Residential Mortgage Corporation. We will walk you through any steps you are required to take which may include giving the contractor advance notice and time to remedy any deficiencies.