Renovation loans are a great way to purchase a property that requires rehabilitation or renovation prior to occupancy. Buyer’s can use a renovation loan to update, rehabilitate or renovate a property.
There are currently two types of loan programs: FHA and Fannie Mae.
The FHA program requires:
- Current seller on title for 90 days
- For Condo projects: 51% owner occupancy in association
- Borrow needs to contribute 3.5%
- FHA Loan limits apply
The Fannie Mae program requires:
- 20% down payment on investment property (contract + renovation cost + fees)
- 10% down payment for owner occupied property (contract + renovation cost + fees)
Within each loan program, there are two programs: streamlined and standard. For the streamlined program, the project must not be a "complicated rehab/renovation", such that no engineer, consultant or architects needed. Typical projects include:
- Remodel kitchen/bath
- Painting (interior or exterior)
- Disability access improvements
- Basement waterproofing
- Window/Door replacement
- Re-siding
- Septic/Well repair/replacement
- Update Appliances
- New Flooring
- New Cabinets
- New Roof, gutters, downspouts
- Replace/Upgrade Furnace or HVAC
- Green Loan
- No structural repairs
Important points to remember regarding many of the renovation loans:
- Must become owner occupied after renovation
- Maximum loan $35,000 for streamlined, higher limit for non-streamlined (standard)
- Timeline: 30 to 60 days to close on this loan
- Closing costs, carry costs, etc. can be rolled into total loan amount
- Budget 10% to 20% for contingencies/cost overruns. Any balance remaining will go toward principle reduction
- Owner CAN NOT do any work. Work must be performed by a contractor that is approved by lender (detailed list of work, permits needed, etc.) Note: some jobs can be performed by general handyman. Homeowner may work under a contractor as a 1099 Independent Contractor and then the labor costs can be reduced.
- Any Change Orders/Work Changes MUST be approved by lender
- Multiple contractors are allowed (different contractors for HVAC, electrical, plumbing, windows, painting, etc.)
The type of property is limited to residential properties including:
- 1-4 unit properties as long as one of the units is owner occupied
- Condominium, Townhouse, single-family home, duplex, triplex, etc.
- Can be used to demolish house as long as foundation is reused
- Property must have certificate of occupancy (CO) for minimum one year
- Manufactured homes
- Moving a home
Buyer’s need to be aware that the renovation loan is a complicated process that requires much up-front work to ensure a successful project. Contact us if you want more information regarding the renovation loan process or need a lender.