What makes the right fixer-upper a great value for a homebuyer? Purchasing a home in need of renovation or repair allows you to secure an undervalued property and build equity fast by making improvements that suit your unique combination of wants, needs, and style preferences. However, home improvements come at a cost. Unless you have deep pockets, you’ll need to find the right financing to capitalize on a fixer-upper’s possibilities and transform it into your dream home. If you’re interested in purchasing a home that needs a little love to reach its full potential, but you don’t want the hassle of two separate loans, these government loans for home repairs might be exactly what you need.
Exploring Government Loans for Home Repairs
According to the 2017 Remodeling Impact Report from the National Association of Realtors (NAR), Americans poured some $340 billion into renovations in 2015. Most seem to consider it money well spent. In the same report, NAR notes that 75 percent of homeowners experience a greater desire to spend time in their homes once the work is completed. At PrimeLending of Kansas City, we thrive on helping our customers navigate the home financing process. We offer a wide range of loan products, including government loans for home repairs. Could one of these renovation loans be the best fit for your needs?
The FHA 203k Renovation Loan
A government-insured loan, the FHA 203k Renovation loan is an appealing choice if you are intrigued by the notion of improving an older or damaged home for use as your primary residence. Like other Federal Housing Administration (FHA) loan programs, it doesn’t require perfect credit, and your down payment can be as low as 3.5 percent. This form of financing allows you to secure both substantial funds for repairs or renovations and the money needed to either purchase or refinance a home in a single loan. Why is a single loan so advantageous? Having just one loan can reduce your costs significantly because you’ll have one payment, one low interest rate, one set of fees, and one round of closing costs. Since this is a long-term loan, you’ll also be able to keep the costs of financing lower by avoiding the higher interest rates and costs associated with short-term borrowing.
An FHA 203k Renovation loan can be used to purchase or refinance a home that is at least one year old and requires rehabilitation work totaling at least $5,000. In addition, the property’s value must be within the FHA’s mortgage limit for the area. It’s worth noting that the lender won’t judge the home’s value on its current condition. Instead, lenders go with either the lesser of its existing value plus the cost of the planned rehabilitation work or 110 percent of the appraised value after the rehabilitation projects are completed. The funds provided by an FHA 203k Renovation loan that are not used for the purchase of the home are put into an escrow account and paid out as the repairs and renovations are completed. While luxury improvements are not allowed, the renovations can be minor or extensive. Projects like the following can be funded with this type of loan:
- Reconstruction and structural alterations
- Functional improvements
- Aesthetic improvements
- Energy efficiency improvements
- Health and safety hazard corrections
- Accessibility features
- Landscaping and site work
Fannie Mae’s Homestyle Renovation Loan
For borrowers interested in government loans for home repairs that offer a bit more flexibility, Fannie Mae’s Homestyle Renovation loan can be a smart option. Like the FHA 203k Renovation loan, a Homestyle Renovation loan allows borrowers to either purchase or refinance a home and get money to rehabilitate it in a single loan. However, the Homestyle Renovation loan isn’t limited to primary residences. It can also be used for rental properties or vacation homes. In addition, the funds raised by this type of financing can be used for any renovation, repair, or rehabilitation project.
With a Homestyle Renovation loan, borrowers must meet slightly stricter credit standards and come up with a minimum down payment of 5 percent.* However, this program offers higher loan limits. In addition, lenders add the value of proposed projects to their calculations when determining the loan-to-value ratio. How much money can you secure for fixing up the property? The limit on renovation funds is set at 75 percent of the lesser of either the property’s appraised value after the rehab is completed or the total of the purchase price and the expected renovation costs.
Are you interested in further exploring government loans for home repairs? We can help. At PrimeLending of Kansas City, we offer home financing programs that include personal attention and straightforward guidance, so you can feel confident as you move forward toward your goals. Contact us today to schedule a consultation with one of our friendly, knowledgeable loan experts.
*Additional restrictions may apply. Contact your PrimeLending loan officer for more details.