Thinking about buying a diamond in the rough to transform into your dream home? It’s no doubt easy to be tempted by all the magical home makeovers seen on home improvement shows these days. With home values rising, this could be a great way to make owning a home a little more affordable for some by buying in a neighborhood that’s going through a transition.
Obviously, you should avoid buying a money pit. By working with professionals, you can be sure that the improvements you are considering will ultimately be worth the effort to increase the value of the home. You don’t want to renovate the house too much for the area, so avoid renovations that aren’t worth it in the end.
But how do you earn a renovation? When you buy the property, you will need enough money for the down payment and closing costs. You take ownership of the house and if you haven’t put the money aside, you will need to take out a home improvement loan or perhaps use a line of credit. It can be difficult to qualify for additional financing if you have just bought a home and these options can also be expensive.
The good news is that there is an affordable solution – there are insured mortgage programs that require a down payment of only 5% that allows you to borrow up to 20% of the purchase price for improvements. If the improvements are over $40,000.00, a full appraisal is required and the advances are managed by the mortgage insurer. The value of the property must be less than $1,000,000.
The value the lender will lend is based on the lower of the property’s improved value or purchase price plus the direct cost of the improvements. The improvements should increase the value of the house once completed.
Here are the steps to take:
Request a mortgage statement from a mortgage professional in advance to determine your maximum approval amount.
Find a house and have a general idea of what needs to be renovated and what it will cost. The purchase price plus the renovation costs may not exceed your maximum approval amount for a mortgage. Lenders will request written quotes detailing the work to be performed and the cost.
Once your offer has been accepted, you must provide your mortgage broker with the accepted offer to buy, as well as the quotes for the improvements. A funding request is sent to the lender that includes the cost of the renovation.
Once you own your home, you can begin the renovation. The lender will instruct the attorney to hold the additional renovation funds until the lender confirms that the works have been completed. Once the renovation is complete, an appraiser will conduct an inspection to verify that the work has been completed according to the quotes.
The lender receives the inspection report from the appraiser and confirms that the work has been carried out properly. They will instruct the attorney that they can release the money to you to pay the contractor.
If the property is appraised at over $1,000,000, other options are available to complete renovations.
If you want to see if this program can help you turn a fixer-upper into the home of your dreams in an affordable way, give me a call. I make an analysis of your needs and financial situation to approve a pre-mortgage.