Some houses may not look that great. They can be outdated, bland and/or are messy enough that a simple cleaning job will not be enough. But the bones are there and the neighborhood is great so you see the potential.
In this case a renovation might be just the solution you need to turn those good bones into your dream home! But since a renovation is a big investment, that can add a lot to the cost of the home.
Looking for ways to pay for a renovation leads to a common question many have which is “can you add renovation costs to your mortgage?”
Whether you are looking to redo your current home or want to prepare a new house before moving in, renovation can be time-consuming and expensive, especially if you are paying for it upfront.
This article will answer your questions and provide more information.
Can You Add Renovation Costs To Your Mortgage?
Yes, you can add renovation costs to your mortgage. In fact, there is what is known as a renovation mortgage loan. Today, we will share with you how exactly you can add renovation costs to your mortgage payments.
A renovation mortgage loan enables borrowers to buy the property they want while also paying for the upgrades and repairs they want. The loan is joined to your mortgage and can be repaid over time with affordable monthly instalments, much like a traditional 30- or 15-year mortgage.
How to Add Renovation Costs to Your Mortgage
First, you will have to choose a lender that offers this type of loan package and apply to the loan. It will be necessary to meet the specific qualifying criteria, such as a good credit score, consistent income, and proof of work, to ensure that you are authorized for the loan.
The specifics of the renovation mortgage loan will vary by lender and program, so we recommend comparing various offers before making a decision.
Second, you will need a professional contractor, whose credentials must be checked by the lender, to come to the property and estimate the cost of the renovation.
The lender will then assess the home’s “as-is” value as well as its “after-repair value”, which takes into account the improvements you intend to complete with your contractor.
Loan Options for a Renovation Costs
The bank uses the after-repair value to decide the amount you can borrow for your renovation.
Options for a renovation mortgage loan include FHA 203k Loans, Fannie Mae HomeStyle Loans, Construction loans, and Cash-Out Financing.
FHA 203k Loans
To qualify for a conventional FHA 203k Loan, the repairs must cost between $5,000 and up to 110 percent of the home’s appraised value after renovations.
The funds are held in an escrow account and can be released by the loan officer in up to five instalments over the course of six months, but only after an inspector inspects the work. If you want to undertake the work yourself, you’ll need to hire a contractor to oversee the project, which will add to your costs.
There are also construction loans. While these types of loans are primarily intended for the ground-up construction of a home, construction loans are often considered an option because they let you borrow based on a home’s future value.
Cash Out Refinancing
Another option is to “cash-out refinance”. Homeowners with sufficient equity can refinance their mortgage to cover the expense of repairs, but this will usually result in a higher interest rate and higher monthly payments.
And there you have it! We hope this answered your questions about adding renovation costs to your mortgage, and the options for doing so.