Renovation Loans
Have you heard of renovation Loans? According to CNBC, Missouri had the nation’s fourth-lowest cost of living in the third quarter of 2018, according to the Missouri Economic Research and Information Center. This means that your dollar goes further in Missouri. In real estate, the three largest real estate markets — St. Louis, Kansas City, and Springfield — combine for an average home price of $202,900 and home value growth of 8.1 percent.
Even though home prices are low comparably, that doesn’t mean there are a large number of houses for sale. You may still have trouble finding something suitable. The Kansas City Star writes, one solution is to broaden the search to fixer-uppers. With renovation loans, you can get one home loan that combines the purchase price with the cost of improvements.
Two Types of Renovation Loans
Renovation loans come in two major types: the FHA 203(k) loan, insured by the Federal Housing Administration, and the HomeStyle loan, guaranteed by Fannie Mae. Both cover most home improvements, whether major or minor.
Both FHA 203(k) and HomeStyle allow use for structural and cosmetic renovations. With both loan types, renovation work may begin immediately after closing.
FHA’s 203(k) loan is for primary residence s only. It requires a minimum credit score of 500 with a down payment of at least 10 percent; a credit score of 580 or higher allows a down payment of 3.5 percent. You may not use these loans for work that the FHA deems a luxury, such as installing a swimming pool.
There are two types of 203(k) renovation loans: limited and standard. The limited is for renovations costing $35,000 or less that don’t require major structural work. The standard is for projects upwards of $35,000 or involving major structural work.
A 203(k) standard loan requires a HUD consultant, who helps the homeowner solicit and analyze bids and oversees inspections of the work. Consultants are often contractors, architects or inspectors, McMullen says. HUD has a tool to search for consultants.
Fannie Mae’s HomeStyle loan allows you to use the loan to buy and fix up a primary residence, second home or investment property. It requires a minimum credit score of 620. The minimum down payment: 3 percent or 5 percent, depending on whether the home is owner-occupied and the borrower a first-time homebuyer or has a low to moderate income.
Pitfalls to Watch for
You can avoid a common pitfall by getting detailed cost estimates. To prevent cost overruns, make sure you identify specific materials in the cost estimates including costs for inspections, permits and consultant fees (if applicable).
How to Get Started
After finding the house you want, choose a lender, decide on a loan type and hire a HUD consultant. Then, with the consultant’s guidance, get estimates from contractors. Your lender will need copies of the estimates.
The renovation work may begin immediately after you close the loan.
When the improvements are complete, you’ll have your home the way you want it — sooner than you might have thought possible.
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Terra Firma Property Solutions, LLC is a professional, full-service real estate solutions firm.
We buy and sell properties throughout the greater Kansas City area. We specialize in buying distressed homes, then renovating and reselling them to home buyers and landlords. Terra Firma Property Solutions: excited to be part of the economic rejuvenation of Kansas City and its surrounding areas.
Call us today at (816) 866.0566
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