"Move-in-ready homes may be selling like hotcakes, but older homes or damaged properties are often passed over," says Margaret Kelly, CEO with RE/MAX. "This is a big opportunity for smart buyers who are willing to overlook cosmetic or other imperfections."
If buyers can look beyond aesthetic characteristics like paint color, hardware and floor coverings, they may discover a diamond in the rough, especially if the home is in the neighborhood where they prefer to live. For example, if they like the overall design of a particular home, but the kitchen is old and the deck needs major repairs, a renovation loan can help them purchase the property while upgrading the kitchen and outdoor space exactly how they want them.
"Many homebuyers are surprised you don't need a ton of money in the bank to fund improvements," explains Kelly. "A special type of loan called a renovation loan is ideal for these types of homes because it covers both the cost of the mortgage and repairs."
Renovation loans can also help buyers who want to purchase in a particular neighborhood where most home prices exceed their budget. Properties that need work are typically listed at a lower cost and often go unsold, creating an opportunity for people willing to make improvements. Buyers can use a renovation loan to get into the neighborhood of their dreams, quickly build equity and customize a home to their personal preferences.
Several variations of renovation loans are available. FHA renovation loans are called 203(k) loans. How much money you want to borrow and the kinds of improvements you plan to make will determine which of the two 203(k) types you need. Freddie Mac and Fannie Mae have their own specific types of renovation loans.
Requirements for the borrower, the amount you can borrow, and the overall structure of the loan are different for each program. Typically, the loan is based on the estimated home value after improvements, and buyers will need to get bids from licensed contractors to help determine the total loan amount as well as a timeline for the work to be completed.
Because finding a home and getting approval of a renovation loan can be complicated, it's wise for buyers to work with a real estate specialist who has experience in these types of sales. For example, RE/MAX agents lead the industry in professional designations and many have experience working with buyers who want a renovation loan. Visit www.remax.com to find an agent in your area.
"A renovation loan really does give homebuyers an edge in today's competitive market," says Kelly. "It's definitely something to research and determine whether it's right for you."