So you’ve found your dream location, but the house sitting on top of it doesn’t exactly scream your style? Or the house has good bones, but every finish in it screams the 1980’s…and not in a cool, retro way?
During the peak of the real estate boom a few years back, someone in Aspen, Colorado, flippantly remarked that anything under $5 million was a “tear down.” That may be the case if your bank account allows it. But don’t discount the idea of a major renovation just because you’re not in the multi-million dollar price bracket.
If you’ve watched any of the home buying programs on television, it all seems so easy. A buyer will look at a house that is under their budget, and casually announce the budget gap “leaves” $100,000 for renovation. Good for them, if they’ve saved $100,000 as part of their down payment. But that’s not typically the way it works. And frankly, it may not be the financially smart approach, even if you have the cash in hand.
Now is the proper time for the disclaimer that Black Canyon Builders is neither a bank, a lender, nor a financial advisor. We present these ideas because financing is an important part of the home buying and remodeling experience for most people. We hope the ideas presented help to expand your real estate options, and help you to formulate questions for your financial experts.
We recently called a local Durango bank to get an update on the status and options for renovation loan mortgages.
Status. Banks certainly lend to buyers who plan to use a portion of the money for a home purchase and the rest for a remodel. This is a practice done at every price point. For instance, if you’ve been pre-approved for $400,000, and you’ve found the ultimate fixer upper for $250,000. You may very well have access to the additional $150,000 for renovations. The question is how you can and should access it.
Options. The 203(k) program is a government-based offering through the U.S. Department of Housing and Urban Development set up for just this purpose. A single mortgage loan is made based on the estimated value of the property after the renovations. There are limits, based on the overall amount of the loan, as well as potentially how much of the loan can be allocated to renovation. With a need for only 3.5% down and the simplicity of one loan to manage, it is a viable option to investigate. The loan officer we spoke with indicated that the 203(k) process can be fairly intensive, and government loans (Fannie Mae) are difficult to get right now.
If you’d like more freedom with your loan, it’s worthwhile to go in person to a bank with whom you already have a strong relationship. While the 203(k) programs are cut and dry, banks have more latitude to develop a financing program best-suited to each customer. There are several avenues to explore:
- A primary mortgage for the purchase price, plus a line of credit for renovations;
- A loan configured similarly to a construction loan, wherein you can defer capital payments (or make no payments at all) during renovation (while you are still paying to live elsewhere); and
- A short-term adjustable rate renovation and mortgage in one, with the intention to refinance to a traditional, fixed rate mortgage post-renovation.
Each of these options has pros and cons of its own. The most important take-away is that there are options to finance a purchase and renovation at the same time. A second important take-away is that these types of loans may charge you upfront (by way of higher interest) for the opportunity, but they are not also beholden to the “golden” ratios of equity. Theoretically, they have as much vision for your property as you do, and they are often willing to loan it.
