Picture this: microwave above the stove, clamshell bathroom sinks, mirrored sliding closet doors, popcorn ceilings, drafty windows, creaky floors, and a choppy floor plan. I’m sure you are conjuring up images of properties you have seen and sold that were straight out of the 1970s or 1980s — but they had good bones, great potential, and just needed some updating.
With home prices escalating, money that would have traditionally been used for these updates is being directed elsewhere, leaving these properties out in the cold with the buyer of today, who is looking for that modern “updated” new home. But they don’t have to be — all you need is your imagination and someone to help finance your dream — enter the renovation mortgage!
A renovation loan can act as either the loan to help acquire the property and do the updates, or it can be used on a home currently owned. The general idea is similar to a construction loan in which the homeowner will work with a contractor to determine the scope of work, and then a value will be placed on the home after improvements are made, and then we can lend on a portion of the value. In some cases, up to 97% of that after improved value!
Sounds simple, but the devil is in the details. Here are just a few:
1. Prepare for it to take more time to close.
For a home renovation loan, the lender not only approves the clients for a loan, but they also have to approve the contractor and the project. The client needs to preview the home and have a good idea of the scope of the work they want and have to do BEFORE they make an offer. To follow best practices, bring the contractor along when touring. Typically, it takes about 45 to 60 days to close, provided the client has identified a contractor and has determined the scope of work needed.
2. Choose a contractor that understands the process.
Renovation loans have certain requirements and schedules under which the contractor can be paid out. This can be different from how the contractor typically works, so having a conversation with the contractor and explaining the payout schedules is a must to ensure your client is not having to change contractors while under contract.
3. The condition of the property matters.
Don’t be fooled by the term renovation. These loans can be used to correct issues in the home that make it ineligible for traditional mortgage financing, such as mold or foundational/structural issues. So you don’t need to use this just to update aesthetics or room layout. Understand that the maximum we can lend is based on the improved value. These required fixes may not necessarily add value to the property, so making that initial offer to purchase is important.
Partnership, education, and setting appropriate expectations are key to a successful transaction when a renovation loan is wanted or required. Fortunately, those things are the backbone of our loan officers’ process. Want to open up more opportunities for your buyers (and sellers)? Reach out to your Key Mortgage loan officer today to learn more about how you can incorporate this option into your client conversations.
