Financing when you have renovation fever

Do your homework before starting any major projects
By AMY STUMPFL
For Brentwood Home Page
With so many home improvement and design shows on television, it’s easy to catch “renovation fever.” But whether you’re looking to remodel your existing home or have found a great fixer-upper to purchase, it’s important to do your homework before you embark on any major – and costly – repairs.

WCAR workshop may help

Renovation financing is a hot topic for both homeowners and potential buyers. Williamson County Association of Realtors will present a class to highlight various options, including the FHA 203(K). Who: Williamson County Association of Realtors What: Renovation Financing Class with Mark Friedman When: 9 a.m.-12 p.m., on Thurs., June 23 Where: 1646 Westgate Circle, Suite 104, in Brentwood Cost: Free for WCAR members; $40 for non-members Info: Registration is required. To learn more, contact WCAR at 771-6845 or visit williamsoncountyrealtors.org

“You need to start by looking at what it is you want to do and how much it’s going to cost,” says Lee Barroll, a mortgage specialist with First Community Mortgage, Inc. “Is this something you can do yourself, or are you going to hire a contractor? Are you getting ready to put your house on the market, or are you looking stay in the house long term?”

Such questions may seem elementary, but your answers can go a long way in determining both feasibility and financing.

“Feasibility is really key, particularly in today’s market,” says Mark Friedman, a renovation specialist manager with Magna Bank. “The problem is that you have houses that have lost so much value, that it just may not make sense to do a major renovation.

“Let’s say you want to buy a house for $100,000, and do $75,000 in renovations. But in this market, the house may only be worth $125,000 – even with all those improvements. So you have to be careful.” 

In fact, according to Remodeling magazine’s most recent “Cost vs. Value Report,” homeowners often recoup less than 80 percent of their renovation cost at resale – and sometimes much less. Estimates vary widely, depending on where you live and the type of project, but it’s certainly an important consideration.

Another important factor is how to finance your renovation. For example, assuming you have built up enough equity in your home, your bank or lender may be able to structure a second mortgage utilizing various products.

“A Home Equity Line of Credit (HELOC) can be a very efficient manner to tackle a remodel,” says David B. Driggs, vice president and mortgage loan officer with Reliant Bank Mortgage Services. “If this path is taken, the consumer can draw on the HELOC as needed and at his or her leisure. The benefit is the consumer only incurs interest expense on the amount drawn, as opposed to having a lump sum given up front. Thus the interest expense begins at the front end and on the whole amount, regardless of what has actually been spent or used.”

Another option is a cash-out refinance, which allows the consumer to access the equity in the home and end up with a single mortgage in place once the loan is closed.

“This method can be beneficial in knowing a permanent fixed-payment mortgage is in place with no further restructuring needed, and without worrying about a floating HELOC rate that can fluctuate,” Driggs says. “Additionally, each and every payment is contributing to reducing the principal amount of the loan, whereas the HELOC payment may only be servicing the interest expense of that loan.”

In addition, the Federal Housing Administration offers the 203(K) Loan program, which allows you to purchase or refinance a property, building the cost of making the repairs and improvements right into the loan. A standard rehab loan requires a minimum of $5,000 up to 110 percent of the improved appraised value. (For smaller projects, a 203(K) Streamline Mortgage covers repairs up to $35,000).

“The advantage is that the loan amount is based on the estimated value of the home after improvements,” Barroll says, noting that this type of loan requires a detailed work write-up and cost estimate, including the cost of materials and labor. “If an appraiser determines that the finished value supports the loan, then the borrower can move forward with the process.”

“This can be a great option as it allows the buyer to get a little creative and build the cost of the renovation into the purchase price of the home,” Driggs adds. “This is easily the most under-utilized FHA product available ... but the challenge with this product comes in when trying to find a lender who offers this specific program.”

Friedman agrees.

“You have to remember that these are just guidelines,” he says. “The lender may require a higher credit score or use lower limits. So it’s not just about looking at different programs, you need to find a lender that’s willing to work with you to meet your particular needs.”

Regardless, Driggs says that it’s vital to have financing in place up front.

“Do not spend a single penny before you get the financing piece in place and formally approved and agreed to,” he cautions. “A consumer will find it beyond difficult going to a bank or lender after any type of construction has begun, but is not yet finished.”

And be prepared for cost overruns.

“In 20 years of doing this, I have yet to see a project come in for less than the original bid price – unless part of the project was scrapped for some reason,” Driggs says. “Expect delays and cost overruns and you will have a much easier time dealing with them when they come up.”