How a Renovation Loan Helps Get You into the Home You Want (Warts and All!)

Home Inspection - Century 21 Cedarcrest RealtyYou’ve been looking at houses with your Cedarcrest Realty agent and found one that fits your budget—but needs a lot of cosmetic work to get them looking their best. You see the potential, but you might not see how you can pay for the remodeling the house requires.

You can get a renovation loan to finance the remodeling costs, and get into a home you might not otherwise be able to afford.

What is a home renovation loan?

Renovation financing is used when the home buyer purchases a property in disrepair to the point that it would not pass a regular appraisal inspection. Issues may be a bad heating system, faulty septic system, or substandard roof. The main criterion is that there is something that will not meet government health and safety requirements for a domicile.

A home renovation loan is bundled as part of your mortgage to finance your purchase and proposed renovation. Jeff Greenberg of Guaranteed Rate Mortgage, a CENTURY 21 Cedarcrest Realty expert resource, explains it this way:

“This type of loan product is not for distressed fix-and-flip properties. Renovation financing is meant for buyers to use on neglected properties they intend to use as their primary residence. The renovation loan is backed by a government agency and can help people buy homes that they ordinarily couldn’t afford to get into due to the subsequent renovation costs they’d have to finance.”

How a renovation loan works

If the buyer is using renovation financing, this information is included in the contract’s comment so the seller knows this is part of the transaction, and understands that the timing for the closing may be longer.

  • These loans require 45 to 60 days and have many elements to them. There are various disclosures to sign, a checklist for the contractor to complete, and a HUD consultant report must be prepared.
  • The home appraiser comes in and provides a report on the necessary work and the contractor writes up estimates based on the report.
  • The building contractor must be licensed and insured, provide three references, and understand how the money is disbursed. For example, the first payment is not disbursed until the first phase of work is completed.
  • The lender conducts a feasibility study before processing the loan to make sure the home’s value will be enhanced within fair market value.
    • The buyer cannot over-improve the home to the point it is taken out of the prevailing market price for similar properties
    • The lender will assess if the contractor’s estimates are in line with prevailing renovation costs
  • The renovation costs are financed into the mortgage (the seller won’t have to finance the construction costs on a credit card or go for a separate loan after the closing)
  • Rates are about .5% higher than a typical mortgage due to the risk involved if the contractor does not complete the job. (An incomplete house is not loan collateral in this circumstance.) The debt-to-income qualifications are the same as a first mortgage.
  • The buyer gives a down payment on the sale price and renovation amounts, and can also finance the closing costs on the renovation portion.
    • For example, a home sells for $400,000 and needs $50,000 in renovations. The buyer gives a down payment on the full $450,000 and finances the rest together in one mortgage product.
  • The buyer has six months from time of closing to complete the work and must hold the loan for at least six months. The buyer can extend the work timeline for another six months if time is needed to complete renovations.

Each government agency for mortgages (FHA, Fannie Mae, Freddie Mac, VA) has a renovation product with its own parameters in terms of loan amount and work allowed. The least restrictive is the FHA, which allows buyers to do any kind of remodeling work as long as you maintain foundation footprint.

Benefits of renovation financing

Renovation financing provides flexibility for buyers and gets everyone to the closing table when a distressed property is for sale.

If a house is in disrepair, you as the buyer are likely be bidding against fewer buyers (since move-in-ready homes are more competitive). If the seller is unwilling or unable to take on the needed repairs, you can close the transaction with the financing needed to get the home in good condition and ready to move in.

“We were delighted to have Jeff present a seminar about renovation loans to our agents, who now have another tool in their real estate toolbox to benefit our customers,” said John Sass, broker owner of CENTURY 21 Cedarcrest Realty. “These loans present our buyers with more opportunities in the North Jersey real estate market, since they can get into a house that has good bones but needs a lot of work. Buyers can take advantage of this loan product to buy the house they want and get to work on it with the financing already in place—and enjoy their new home knowing important cosmetic and structural renovations are taken care of from the start.”

Planning to Sell Your Home Soon? Hold Off on Too Many Renovations
Certain Home Renovations Deliver ROI. Others, Not so Much.

Many homeowners who are tired of staring at their interiors through the pandemic are anxious to renovate and make some upgrades. However, it you plan to list your home for sale in the foreseeable future—say, within the next two years—you might want to resist renovation temptation. Many major home improvements are costly and you will never see the money back at time of sale.

Sure, it may help your home stand out from others in your local market, but the money you spend will not automatically come back to you in full when you close.

Remodeling magazine put out a 2021 Cost vs. Value Report that lists 22 popular projects and tracks their cost, resale value and ROI in terms of percentage recovered at resale. You can search by U.S. region (the report covers 150 different U.S. housing markets) for how prices stack up in your area and which projects will yield the best return or retain the most value at resale.

The top remodeling projects which did the best in terms of net cost vs. value (60% ROI or higher) are:
1 – Garage door replacement – highest at 94%
2 – Manufactured stone veneer
3 – Minor kitchen remodel – you will only recover 72% of the cost
4 – Siding replacement (fiber cement did slight better than vinyl)
5 – Window replacement (vinyl did slightly better than wood for this project)
6 – Deck addition (wood)
7 – Entry door replacement (steel)
8 – Deck addition (composite)
9 – Grand entrance (fiberglass)
10 – Asphalt shingle roof replacement
11 – Mid-range bathroom remodel

You can read the entire report here.

Repairs and renovations that make financial sense
Harvard’s Joint Center for Housing Studies estimates that Americans’ total spend on home remodeling projects will rise to $337 billion in the second half of 2021, and increase of $5 billion from third quarter 2020. This, despite the fact that the average amount recouped for home remodeling projects. However, if you want to catch buyers’ attention, there are quite a few projects worth investing in:

1 – Expanding square footage is at the top of that list. In 2020, 44% of real estate agents cited the “need for more space” as the top motivator for moving. Creating a more open floor plan is also an attention-getter.

2 – Curb appeal is so important—it’s the first impression prospective buyers get of your home. A nicely landscaped home says “well maintained” and the landscaping costs will bring sales results.

3 – Finishing the basement ups the asking price to high-income home buyers in the Northeast, Mid-Atlantic and Pacific Northwest according to the NAHB.

4 – Definitely in invest some money and time into touching up the paint (or repainting altogether) to make the house look fresh and well-cared-for. Light neutral colors are advised. Now is a great time to power wash the exterior and your patio or walkways.

5 – If you are tempted to redo the bathrooms or kitchen, make moderate upgrades that update the look without breaking the bank. For example, change out the cabinet and drawer fronts but keep the cabinet boxes in place. Replace fixtures or install a new floor if the current one is worn or outdated.

6 – If your home has hardwood floors, refinish them as needed or replace them with new wood flooring. The NAR’s 2019 Remodeling Impact Report states that refinishing hardwood floors recovers 100% of the cost at resale, while new wood flooring recoups 106% of costs.

7 – Handle big-ticket repair items such as replacing a roof or installing a new HVAC system. Also, buyers look for energy efficiency and savings on utility costs so consider putting in energy-efficient appliances (Energy Star), smart or programmable thermostats, energy-efficient windows, and low-flow toilets.

At CENTURY 21 Cedarcrest Realty, our real estate agents can guide you on what will make the most sense to invest in before you list your home for sale. We know what buyers are looking for in the North Jersey real estate markets in which we specialize, and can connect you with other professionals who can bring new life to your home to help it sell more quickly to the right buyers. Contact us at 973-228-1050 to discuss how we’ll market your home or for help finding the home of your dreams.