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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2017

A Home in Need of a Hug

Renovation loans open up possibilities in a tight housing market

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Read more about renovation loan products at:

FHA 203(k) Training Module:


FHA 203(k) Documents:


HomeStyle Overview:


The increased use of technology when searching for and purchasing a home puts buyers in the driver’s seat, but the drawback to not working with knowledgeable Realtors and mortgage originators is that homebuyers may not learn about the variety of lending options available to them. Computers may be faster, but they can’t adequately analyze a buyer’s situation and provide options that may make more sense for their circumstances and financial goals.

Many young first-time buyers are staying out of the market today and continuing to rent because they can’t find a turnkey home that fits their exact style. Most mortgage professionals have heard from clients who decided not to put an offer on a home because the wallpaper was ugly, the countertops needed to be replaced or because they didn’t want to deal with any work out of fear that their lack of time or budget would hinder them.

Other buyers end up purchasing an older home anticipating they will fix issues over time. Oftentimes, reality sets in months later and what seemed like a great idea ends up being a never-ending to-do list and a potentially expanding budget with the potential for debt. As time goes on it becomes more likely that the owner will decide it’s not worth the money or time and, instead of fixing their home, they list it after completing a few minor upgrades and search for a new turnkey house that doesn’t require repairs.

According to a 2015 American Housing Survey, 44 percent of owner-occupied homes in the U.S. were built prior to 1969, and 83 percent were built before 2000. As we close in on 2018, this means that five out of six homes in the U.S. are nearly 20 years old and close to half are almost 50 years old or older.

Many homebuyers in the future will want to perform some type of renovation on the homes they purchase. By working with educated and experienced mortgage originators instead of going through an automated system, borrowers can learn about renovation options that are appropriate for their situation.

Loan options

Unfortunately, many homebuyers don’t realize that there are other financing options available. Renovation loans allow borrowers to fix all needed repair items and add their own personal touches without having to spend additional money once they own the home. They can absorb the cost of renovations directly into their mortgage.

Renovation loans come in several shapes and sizes. The various products allow for everything from minor repairs to the potential to tear down an existing structure and rebuild it, provided the borrowers use the existing foundation. If you can think it or dream it, most likely it can be done with one of the renovation products available.

Renovations are typically done using either Federal Housing Administration (FHA) or conventional renovation loan programs, depending on the borrower’s qualifications and what work needs to be done to the home. FHA has the 203(k) loan, which comes in either a limited or standard program. The conventional product is called a Fannie Mae HomeStyle loan.

A limited 203(k) loan can be used for minor repair items that are mostly aesthetic in nature and has a capped repair budget of $35,000. The standard 203(k) loan allows borrowers to complete both aesthetic and structural work. The HomeStyle loan allows for both structural and nonstructural repairs with the only limitation being the repairs must be permanent and add value to the home.

Renovation benefits

Renovation loans are powerful because they open up a whole set of inventory. Renovation loans can take fixer-uppers that many buyers were leery to purchase — homes that may have sat on the market for months on end — and turn them into a buyer’s dream home.

These loans allow buyers to pick their desired neighborhood and overall living package regardless of a home’s condition. Rather than settling for whatever they can find on the market, these specialized mortgage products allows borrowers to create the individualized home of their dreams, one that is safe, comfortable and highly personalized.

In addition, renovation loans can create instant equity for homeowners as well as the opportunity to customize a new home because the after-improved value of the home will generally exceed the cost of purchase and repairs. Plus, the loan-to-value ratio for a renovation loan tends to be higher than a conventional first mortgage combined with a second-lien home equity line of credit, so buyers can borrow more to complete their desired renovations.

Finally, renovation loans are a reasonably priced way to finance big-ticket repairs. The cost of a roof, furnace or new bathroom can be exorbitant, but these large-ticket items can be financed with minimal impact when factored into a monthly mortgage payment.

•  •  •

More and more, digital automation is becoming the norm in business. But in a highly personal business such as mortgage lending, automation can sometimes hurt clients. Originators need to be able to educate borrowers — in the digital space and in person — about their options to make sure they end up with the right loan for their personal circumstance. Borrowers need to understand that just as their financial circumstances are different from others, so too are the loan options available to them.

This doesn’t mean mortgages can’t be automated. It simply means the process of buying a home must start with a personal touch to ensure that borrowers know all of their options. If a renovation loan works for a borrower, it often can make possible that homebuyer’s desire for a customized home in a way that doesn’t require additional money post-closing. The borrower can then purchase that new home with an attainable to-do list and, hopefully, with much more confidence.


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