What is a Renovation HELOC?
A Renovation Home Equity Line of Credit (“HELOC”) is a line of credit extended to homeowners who leverage their home equity as collateral to make home improvements and is often in second lien position behind a first mortgage. Renovation HELOC proceeds must initially be used to cover the costs of home improvements. Once improvements have been made, the line of credit remains open and may be used for any other purpose. Renovation HELOCs may be obtained at the time a home is purchased, or any time thereafter.
There are no required improvements, but there is a minimum loan amount of $50,000. The lesser of 95% of the property’s “After-Renovated Value” (“ARV”) – the estimated future value of the home once home improvements have been completed – or 125% of the property’s “as-is” value may be used to cover the costs of home improvements. Up to $500,000 may be borrowed when the combined loan-to-value (“CLTV”) is between 66%-95%. When CLTV is equal to or less than 65%, up to $750,000 may be borrowed.
Renovation HELOCs do not require the use of a third-party Consultant to manage renovation projects. Homeowners pay contractors directly as work is being performed, drawing on their home equity line of credit and no draw inspections are required. However, a completion report must be obtained from the appraiser once work has been completed.
What properties are eligible for a Renovation HELOC?
Renovation HELOC eligible properties include:
- 1-2 units, owner-occupied or second homes
- Homes with an Accessory Dwelling Unit (ADU)
- Historical Properties (require approval for repairs from governing historical society)
- Planned Unit Developments (“PUD”)
- Rural properties with excess acreage (not agricultural properties)
- Townhome
- Warrantable condos (non-structural improvements only)
What improvements are allowed with a Renovation HELOC?
You can choose which repairs you would like to finance, but it is important to note that any appraiser-noted deficiencies and repairs must be addressed prior to loan closing. The Renovation HELOC is designed to finance improvements that will add value to a property but may not be used for repairs necessary to make a home habitable.
Tear-downs and rebuilds are not allowed.
What are the Renovation HELOC Appraisal Requirements?
- As-Is Appraisal: As-is appraisals are never required for Renovation HELOCs, but one may be required for a first mortgage if a home buyer is purchasing a property and simultaneously obtaining a Renovation HELOC.
- After-Improved Appraisal: An after-improved appraisal is required for every Renovation HELOC.
What are Renovation HELOC Financeable Renovation Costs?
- Hard costs (i.e., labor and materials from the contractor’s bid)
- Architectural fees
- Engineering fees
- A contingency reserve may be required on a case-by-case basis to cover unforeseen repairs that are discovered during renovation. The amount of contingency will vary and may even be included in your contractor’s bid
Other Highlights of the Renovation HELOC
- Homebuyers can place more competitive offers on properties that need updates – avoiding the reference of renovation financing in their offer which is attractive to sellers – while simultaneously obtaining a Renovation HELOC to cover home improvement costs after home purchase
- Homeowners do not have to pay off low-interest first mortgages to tap into their home equity while still gaining the benefit of leveraging After-Renovated Value (“ARV”) to tap into future home equity
- Rates are based on Prime Rate plus a margin
- Interest-only payments are due monthly based on the amount that has been drawn on the line for the first 10 years, but homeowners must qualify using the fully-amortized payment over a 20-year term
- A $149/month supervision fee is imposed during renovation, but ceases once home improvements have been completed
- There are no pre-payment penalties or early pay-off fees
- Your contractor’s credentials will be vetted. Any contractor hired will have to provide proof of licensing (if required), a Certificate of Liability Insurance, Worker’s Compensation (if required), and references
- Contractors are required to provide a detailed cost estimate with a labor and materials breakdown, plans and specs or drawings (if applicable), a timeline for project completion, their payment schedule, change order procedures, and warranty information
- Renovation HELOCs are not available in Texas
Draw Process of the Renovation HELOC
Homeowners have complete control over disbursements to contractors. This is not managed by the lending institution.
There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.
Below is a high-level overview of the renovation loans Diamond Residential Mortgage Corporation offers. For more information, explore FAQs and Blog.
There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.
Below is a high-level overview of the renovation loans Diamond Residential Mortgage Corporation offers. For more information, explore FAQs and Blog.
Keys To Success:
- Inquire early! If you attempt to place an offer on a property that is listed for sale without a pre-qualification letter, your offer may be rejected and you may miss a window of opportunity. It is best to secure financing before you are too far into the buying process.
- Make sure your contractor is on board with the contractor qualifications, bid requirements, and draw process required for your loan type.
- If a Consultant is involved, meet together at the property with the contractor, so all parties can finalize the scope of work together.
- Provide requested paperwork quickly to meet contract deadlines. Time lost on the front end of a deal oftentimes cannot be made up on the back end of the deal to hit closing deadlines.
- Be decisive! Decide on the details of your renovation project early and resist the temptation to make changes throughout the loan process. Wavering during the process can cause delays with your closing. Feel confident in pushing forward with the decisions you make at the onset of the transaction. That’s not to say you can’t make changes along the way, but making those changes mid-stream will likely cause delays.
