This post is courtesy of one of our go-to lenders, Eric Boutcher, from Atlantic Coast Mortgage. We asked him to address one of the top challenges our Instagram loving and HGTV obsessed buyers face; they find a house with ‘great bones’ but it needs updating. These updates are almost always cosmetic in nature (a new kitchen, new baths, finishing a basement, etc) but buyers are stretching to afford the down-payment and don’t have additional funds for improvements immediately after closing. Read on to learn all about a Streamlined Renovation loan and we’ll get you on your way to an Insta-perfect kitchen in no time.
One of the most commonly asked questions I receive from buyers is, “how do I finance repairs on a home I am purchasing?” Since the mortgage meltdown, obtaining financing for future repairs and improvements has been nothing short of challenging for many consumers. Often construction products are expensive and have more restrictive underwriting guidelines such as:
- Minimum 20% down
- Need full plans and specs from builder
- Lower debt to income ratios
- Higher credit score requirements
There’s also the fact that if you’re in a competitive situation, most buyers don’t have the time needed for contractors, architects, designers, etc. to generate the documents necessary for these programs.
All of this has posed a significant roadblock for many consumers who’ve essentially been left to finance upgrades and repairs on their own – especially those looking to make cosmetic upgrades. Why does anyone want to have plans and specs drawn up when they’re just looking to spruce the house up – paint the interior, replace the carpet, upgrade the HVAC, redo a bathroom. The answer is, they don’t. For much of the last decade, the solution has been one of 2 choices:
- Buy the house as-is and come out of pocket for the repairs after the fact
- Pass on the house altogether and find something that is turnkey
This is bad for buyers and sellers. Homes that need some TLC are often unattainable for many buyers… and sellers feel that pain. That is until now. If you’re looking for a value buy where you can see past some cosmetic deficiencies in a home, we may have a way for you to finance the purchase AND cosmetic upgrades all in one 30 year fixed mortgage. Recently we rolled out a Streamlined Renovation loan product to help buyers finance property improvements.
Buyers love this product for six reasons:
- Single close on a 30-year fixed mortgage
- Finance up to 15% of the “as completed” value for non-structural improvements to the property
- Put as little as 5% down up to a loan amount of $726,525
- Architectural plans and specifications are not required
- This allows buyers to move fast and compete in a fast-paced market
- Financing options available for primary residences, 2nd homes, and investment properties
- They can tackle these types of projects:
- Kitchen update
- Bathroom update
- Finishing a basement
- Flooring and painting
- Updating electrical or adding a new HVAC
Contractors love the product for two reasons:
- The only required documentation is a signed contract and a copy of their license.
- All of the money for the work is held in escrow, so they are guaranteed to get paid as long as they do their part – complete the work per the terms of the contract.
- Buyers need to have the fully executed bid/contract signed by the borrowers and contractor prior to closing.
- All work must be completed within 90 days after settlement.
- No changes or alterations to the foundation of the property.
- 10% contingency reserve is required (10% of construction costs).
- Loan to value is derived from the lesser of the “as completed” value of the home or the sum of the purchase price, renovation costs and, contingency reserves.
I do want to stress that this is not for the addition you’re looking to put on the back of the house. But it is a way to leverage financing to give your property a face-lift and add value to your home. There are LOTS of nuances with a Streamlined Renovation loan, too many to outline in a quick blog. For specific scenarios, I am happy to talk through things in more detail.
The good news is that there are options if you’re looking at a home with ‘good bones, and a lot of potential’ but don’t know how you are going to come up with the down payment + additional cash for the work.