mortgage

These mortgages pay for home renovations

Toy houses
Highlights
  • Home renovation mortgages are for buyers as well as refinancers.
  • The loan amount is based on the expected value after work is finished.
  • The FHA and Fannie Mae loan programs have important differences.

Two little-known home renovation mortgage programs offer solutions for buyers and homeowners who want to renovate.

Fannie Mae and the Federal Housing Administration have home renovation mortgage programs that allow buyers to borrow based on what the house is expected to be worth after the home rehab is completed. Homeowners can also use both programs to refinance their existing mortgage plus the renovation costs into one loan.

FHA's 203(k) program and Fannie's HomeStyle Renovation Mortgage have been around for years. In the old days, when most borrowers could easily get second mortgages or generous credit lines to pay for renovations, these loans weren't as appealing as they are today.

Home renovation loans in demand

"A couple years ago there wasn't as much demand for these loans," says Leesa Sandoval, a loan officer with PrimeLending in Dallas who specializes in renovation mortgages. "But now they are great to get some of this (housing) inventory sold and get these foreclosures out of the market."

The FHA insured 22,491 home renovation mortgages in the 2010 fiscal year, according to the agency's latest report on 203(k) loans. That is more than six times the number of 203(k) loans the agency insured in 2007. Fannie says the volume of HomeStyle loans has picked up recently, but declined to provide details.

Dustan Shepherd, a loan officer and 203(k) specialist with BNC National Bank in Overland Park, Kan., says while demand for the rehab loans is up, many borrowers are not aware of the programs or think they are too complicated.

"But it's not as complex as it sounds," Shepherd says.

How it works

Unlike credit lines, these renovation loans require borrowers to show the money was spent on the house. In the standard FHA 203(k) program, the borrower hires a consultant to assess the construction plan and to perform an inspection before each draw is made. A "draw" happens when a portion of the money is disbursed to the contractor. Borrowers have up to six months to finish the project and are allowed up to five draws. The HomeStyle program does not require a consultant to monitor the work, only an initial and final inspection.

Great for foreclosure hunters

While rehab loans involve more work than traditional mortgages, they can be a great tool for those who want to buy discounted homes that need repair.

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