If Only the House had …

If you’re out hunting for houses, you may be finding that not every house seems to fit your needs or your wants to a “T”.   Maybe the houses you find have 75% of what you want, but the other 25% makes it so you don’t want “that” house.  And it makes sense to not settle for something that doesn’t meet most of your needs.

Or maybe you have found the perfect house, but it isn’t up to snuff electrically or needs a new roof or just has too many things wrong with it to even consider starring in your own Money Pit movie!  It’s no fun going into a house knowing that you will spend a ton of money out of pocket just to get it structurally and mechanically livable.

There is a light at the end of this tunnel, hopefully one that gets you the house that meets 75% of your needs and with some help, gets you to 100% perfection (well, we know that really can’t happen, but it’s worth a try!).

In comes the renovation loan. There are a few options out there – both of which MidCountry Mortgage offers.

The first option is the FHA 203K loan.  This loan is specific to FHA financing and follows FHA guidelines for qualifying with a minimum of 3.5% down.  The difference is that you can borrower money to do the work that you want done and the work that the FHA appraiser says needs to be done (also known as work orders).  The work and fees get rolled into your total loan and FHA only allows this loan type on a primary residence.

There are two versions of the FHA 203K loan – one is called Limited and the other is called Standard.  The Limited version allows the borrower to finance up to $35,000 into their loan not to exceed the  FHA county loan limits.  And of course, as with all mortgage loans, the borrower must qualify for the higher loan amount.  The loan amount must include the work to be done, fees associated with the FHA 203K loan, contingency reserve (percentage of the work held aside for overages) and permits.  This usually allows for the bid to be approximately $30,000-$31,000.  The bid must include labor and materials.

It’s called the Limited due to the cap on the amount that can be financed, but it’s also limited in nature to “what” can be done. You could rehab a bathroom, finish a basement, replace shingles or windows, get new appliances or flooring and of course, anything health and safety related that FHA may require.  The house may not have running water or may be in need of a new well – both of which can be taken care of with an FHA 203K loan!  What you can’t do is anything that is considered luxury (pool – bummer, right?) or anything structurally or dealing with the foundation.

There is good news for those of you who are first time home buyers. If you utilize one of the first time buyer programs with MN Housing, you can use the Limited version of the FHA 203K loan to help make this home the way you want and take advantage of down payment and closing cost assistance!

The second FHA 203K version, Standard, has no cap other than the maximum county loan limits.  The Standard has a few additional requirements and fees, such as the need for an FHA 203K consultant.  This person reviews the contractor’s bid and also visits the home to determine the scope of the work, adding in anything that FHA would require in order to meet FHA guidelines, such as health and safety issues.

With this version, you could add a garage, move a home from one location to another, add another story to the house, move a load-bearing wall or do any and all of the things listed above. More than anything, this is going to be for a purchase or refinance that requires more than $35,000 and may possibly require work to the structure or foundation.

With both FHA 203K versions, an appraisal will be done taking into account “after-improved” value (home value given by the appraiser taking the work to be done into account). The maximum loan allowed with FHA is 96.5% of the lesser of the sale price paid for the home plus the renovation bid and 203K costs OR 110% of the after-improved value.

The second option is the Fannie Mae Homestyle.  This is conventional financing, whereas the FHA 203K is FHA financing.  This loan type is more similar to the Standard FHA 203K version in that there are no caps as to the amount of work that can be done, except by your qualifying and the maximum loan limit with Fannie Mae.

The renovation costs include the bid (labor and materials), a contingency reserve and fees specific to the renovation loan, all of which are rolled into the loan. There will also be a fee for a person to perform a feasibility study (similar to the 203K consultant).

For a primary residence, you are required to put 5% down off the lesser of the purchase price plus the cost of renovation or the “after-improved/as-completed” value.   One thing to note is that the cost of the renovation cannot be more than 50% of the after-improved value.   For example, if the after-improved value is $300,000, the renovation costs (including fees) cannot exceed $150,000.

The Fannie Mae Homestyle can also be used to purchase or refinance a second home (10% down required) or investment property (15% down) but 20-25% down is preferable with investment as the monthly mortgage insurance costs are higher on investment homes.

Regardless of using the FHA 203K or the Fannie Mae Homestyle, you will be taking a loan out for more than what you paid for the home. Almost all lenders/investors require that you use a contractor (self-help not allowed), even though FHA guidelines allow for self-help.

Keep in mind, these loans take a little bit longer from start to finish since each situation is different and we are dealing with a third party – the contractor you choose. In the end, though, it’s worth the wait to be able to get as close to the 100% perfect home you want and need!  I am here to help make the home you find the home you will love!