Renovation Loans – Advice from a Mortgage Professional:

One of the biggest challenges in the current real estate market is the lack of inventory. What do you do if you’re a homebuyer and there are only a handful of properties in your location and price range with the features you want? There are a lot of people who are stuck in this cycle, waiting and waiting, checking every new listing, hoping this will be the one.

But what if instead of settling for a property you don’t quite love, you could create the home of your dreams and tailor it to your exact specifications? This is the magic of a renovation loan!

John Lundholm, mortgage professional for Quintessential Mortgage Group, and a guest at our April Buying Into Brooklyn workshop has some great tips to share on renovation loan options for NYC buyers/homeowners!

What Is a Renovation Loan?

These types of mortgages allow you to pay for both the home purchase and the cost of construction or renovation with one combined loan. You could buy a home as-is, then complete anything from cosmetic changes to full gut renovations, even taking the property down to the foundation and rebuilding. And all with one closing and a down payment based on the future value of the property after the renovation.

Sellers can also benefit from these types of loans—if they’re struggling with a dated property, like an estate sale, they can use these types of loans to finally land a buyer. They might do a renovation themselves or put together proposed plans for prospective purchasers.

The Two Major Categories of Home Renovations:

2) Minor Renovations:

For many, some minor updating is all that a home needs. Not a fan of that kitchen that hasn’t been touched in decades? Is the property in need of a few thousand in deferred maintenance projects? There are a number of options that are perfect for this, many backed by Fannie Mae, Freddie Mac, and the FHA.

In fact, there are even private label renovation loans that don’t require a contractor if you buy your materials through certain big box home improvement stores and use their installation services. These are great if you are updating existing finishes, or if the renovations will be under certain dollar thresholds. The paperwork can often be more streamlined for these lighter lifts too.

2) Extensive Renovations:

For more extensive work, Freddie Mac and the FHA have options for most property types that will allow gut renovations, tear downs to the foundation, or additions and extensions to the home. Some of these options also enable you to buy properties that have such extensive damage that they are unfinanceable using traditional loan structures. With a renovation loan, you might be able to scoop up a property that most other buyers can’t. Instead of fighting low inventory and loads of competition, you could finally have your winning bid, and maybe at a great price too!

What is the Process of Getting a Renovation Loan?

The renovation loan process is similar to other mortgages: verifying income, assets, and credit history. However, there are a handful of big departures. The first is that you’ll need detailed renovation plans and a team in place. Part of the approval process is a review of your proposals, your budget, and your team to ensure everything is feasible. The lenders will often help you to gather these documents by working directly with the contractors.

The second big change comes after the approvals are completed. At the closing, you will pay for the property and take ownership. Afterward, the lender will disburse the loan proceeds directly to the construction team, dripping it out in stages as the work progresses. This helps ensure everything happens as promised, and it goes a long way toward preventing cost overruns.

All of this can be exciting but also a bit overwhelming (as with many large projects). Yet having the right team in place can make all the difference! You’ll want a great real estate agent, a great mortgage professional, and a great renovation team. They will take you through all of the key processes.

A Few Other Things to Know:

Renovation loans may require as little as a 3% down payment.
They are available for Primary, 2nd home, and Investment properties.
Eligible property types include 1-4 Family homes, condos, coops, mixed-use, unique property conversions, and ground-up construction.
Most of these loans have caps. They vary by location, but in higher price markets they can range from $766,250 all the way up to $2,211,600 for multi-unit properties. (2024 limits)

If you’re interested in learning more, please feel free to schedule a call with John Lundholm here.

We hope that was all helpful and puts you on track to building the home of your dreams!

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If you’re interested in learning more about the buying process, download our free Buying Into Brooklyn Ebook and join one of our free Buying Into Brooklyn workshops. We share a ton of valuable resources to demystify the buying process and help you become a Brooklyn home-owner.