You have your eye on that Cape Cod on the corner. You see the beauty beyond its shabby, unkempt appearance. It will be a gem and the prettiest house on the block once you fix it up. However, you’ll need a loan to buy it and to rehab it. Where do you turn?
There are several options out there that can make the situation easier. You get the loan to buy the property, and then there is a reserve put in escrow to help you continually pay for the changes being done.
Terry Lambert, home mortgage specialist for AgStar Financial Services in Bloomer, Wis., says she has a lot of clients looking for financing for fixer uppers.
“A lot of them are trying to save money and do the work themselves. Many look for those types of properties to fix up and re-sell for profit,” she says. A lot of ideas seem to come from the fixer upper television shows, which seem to mainly be more people doing the improvements on homes they plan to live in.
At her agency, they have a special process specifically for purchasing rehabs or constructions loans in general. “We use what is called a sworn statement – which is basically a very complete checklist of typical construction processes, materials and labor so the borrower doesn’t miss anything when they are obtaining all of their bids,” Lambert says.
It really is a breakdown of most things they might possibly run into so they have the funding set up appropriately and don’t run shot on funds and don’t find themselves in a situation where they are not able to finish the project.
“We also always add in a 10 percent contingency fund amount over and above the total of the bids/estimates in case there are any cost overruns or unforeseen items that pop up that need to be taken care of as well,” she explains. “Our preference is to disburse funds directly to the vendors so that we can actually stamp the back of the checks with a lien waiver stamp – which saves the client the hassle of having to get the waivers signed by the vendors.”
Lambert says that AgStar’s construction and rehab loans have some high requirements including borrowers must have a credit score of 720 or higher; debt-to-income ratio of 36 percent or less; and 20 percent down of the overall appraised value.
“There are cases where the client doesn’t actually have to come into a closing with any down payment or cash out of pocket. We do allow our clients to be their own general contractors, which is becoming rare among lenders,” Lambert says.
Here Are a Few Rehab Loans Available
Fannie Mae HomeStyle Renovation Mortgage: This loan allows borrowers to make renovations up to 50 percent of the as-completed appraised value of the property with a first mortgage rather than getting a second mortgage, home equity line of credit or other financing. By having just one loan, you eliminate having more than one set of closing costs. You also typically get a much lower interest rate on a first mortgage. Borrowers can qualify for up to 105 percent combined loan-to-value.
Also, according to Fannie Mae, the renovation work must be completed no later than 12 months from the date the mortgage loan was delivered. The lender is responsible for monitoring the completion of the rehab work.
Federal Housing Administration (FHA) 203(k) Rehabilitation Loan: FHA partners with state and local housing agencies and non-profit organizations to rehabilitate properties. With the rehab loan, you get funds for the rehabilitation and you only need to put down as little as 3.5 percent. Sometimes, you can get down payment and closing cost assistance, depending on the area you are buying the house. Some counties and specific neighborhoods do offer incentives for people to rehab homes.
Lambert says that closing costs for rehab and construction is similar to a normal mortgage loan. However, there are two additional fees that are charged – one for all the additional disbursements that will be made during the process, and another for the additional inspections that need to be done during the process.
“If the loan is to stay as a portfolio loan, meaning an in-house type loan, we can just lock the interest rate, and there is no further cost and other paperwork needing to be done. Otherwise, we would need to refinance the loan for secondary market,” she says.