Mountain Mortgage Guy: Loans for home rehab are becoming easier to get (column)
As part of the ever-expanding array of mortgage products out there, homebuyers now have options that include being able to borrow funds to fix up that fixer-upper and finance most of the cost into their first mortgage. It’s not for all, and it won’t work for every scenario, but for many, it could be a great path to homeownership.
Let’s say you found a home with a great floor plan and a location that suits you and the price is $500,000. But there is a catch: The carpet looks like something the hazmat team should take and encapsulate and bury in a 25-foot-deep pit, and the kitchen is, shall we say, old Vail. To top it off, the bathrooms have a baby blue tub and a harvest gold sink. Throw in some flocked wallpaper while we are at it. You get the picture.
But other updated homes of the same size in the same area are selling for $600,000, and you are pretty sure that with a new kitchen, bathrooms and carpet this place would appraise at that much. Your contractor is willing to do the projects for $60,000, which would leave you needing $560,000. You only have about $30,000 to put down, which if you got a 95 percent loan, would require $25,000 and only leave you $5,000 for a $60,000 remodel.
Who you gonna call? Calling Ghostbusters won’t help, but a good mortgage broker who knows his stuff might just be able to show you how to put this all together. There is a mortgage loan program widely available that would work for the above scenario.
The way this works is you get a firm bid from a qualified contractor for the remodel work. We then order an appraisal on a “to be completed” basis and give the appraiser a detailed list of the improvements you plan to make.
If the appraiser agrees the new value would be $600,000, then the lender will loan you up to 95 percent of the appraised value, meaning you would put $30,000 down and could borrow $570,000, but, in this case, you would borrow $566,000. The lender will plug a 10 percent contingency ($6,000) into the loan amount just in case there are hidden costs.
So, come closing day, first you put down the $30,000 and then $470,000 of the loan would go toward closing on the house. The remainder of the money ($66,000) would be held in escrow, and as the remodel progressed, you could draw on the money to pay the contractor. If at the end there is money left over, it will go to principal reduction on the loan.
This program can also be used for refinancing your current home and getting cash out to do a remodel or addition. It allows you to highly leverage your equity or down payment, far more so than pursuing the traditional route of financing such projects via a home equity loan. Home equity loans rarely can exceed about 80 percent to 85 percent loan to value and do not take into account the value of the improvements. This program does take that into account and lets you go to 95 percent loan to value.
Keep in mind not every home-improvement project will add dollar for dollar to the appraised value, and that can be when this program might not work.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.