Are you thinking about getting a construction or renovation loan but aren’t sure which one is best for you? In this video, I’m going to walk you through the different loan programs available for both construction and renovation loans. We’ll look at the qualifications and details of each type so you can choose the right option for your situation.
Your Financing Strategy
It’s important to choose the right loan because your financing strategy makes all the difference in the world. There are a few questions you’re going to need to answer before we can go to the next step.
First, how long are you going to hold on to the property? Three years, five years, or ten years? Is using this property as an investment and a rental when you’re complete an option? How much are you considering for your down payment?
Do you already own the property, or are you trying to acquire it? What’s your credit? Once you have the answers to these questions, we’re going to break down the renovation and construction loan program so you can see and determine which is the best for you.
The FHA Loan
The first loan we’re going to talk about is FHA. There are two versions: a streamline and a standard. One of the benefits of using the FHA program is that it requires only a 3.5% down payment. It also allows for lower FICO scores and higher debt ratios. This program is typically for somebody that doesn’t have a large down payment and may not have the best credit.
How It Works
In general, here’s how the program works. The streamline loan is for $35,000 or less of renovation work with nothing structural. This applies to cosmetic updates like new paint, a new roof, new windows flooring, and updates to the bathrooms and kitchen. On the other hand, the standard 203K loan is for anything above $35,000 in renovation costs—or if there’s anything structural involved.
You’ll also need to have a 203K consultant for a property where somebody wants to do a major remodel—like adding a bedroom or a bath or moving a load-bearing wall, as these are all structural. Additionally, any termite damage, lead-based paint, asbestos, or mold would all go into a standard program.
The Pros And Cons
One of the things that borrowers don’t like about this program is that there’s a one in three quarter percent upfront mortgage insurance. Additionally, the monthly is .85%, regardless of your FICO score. This makes the 203K program a little more expensive because of the upfront cost and the monthly carrying cost.
Typically, we see people do the 203K who can’t qualify for conventional loan programs.
The Conventional Loan
Now that we know what the FHA loan offers, let’s talk about conventional construction and renovation programs. Conventional programs are typically for somebody that has a little bit more downpayment and a higher FICO score. This loan program is going to have better pricing, lower closing costs, and lower carrying costs.
Additionally, we have expanded guidelines on the conventional loan as far as what can be done. For example, you can add a swimming pool and do landscaping and fencing—which you can’t do with the FHA program. If you qualify, this is one of the better programs for you.
Limits On Repairs
The only thing we have to be careful about is that there is a limit on the number of repairs that can be done; they can’t be more than 75% of the after-completed value. For example, let’s say you were purchasing a property for $100,000, and you wanted to put $300,000 into renovation or repairs. You would then exceed the 75% limit.
Alternatively, let’s say our after-completed value is $100,000. This would mean the renovation cannot be more than $75,000 on that property. The key for this program is to find the right property so that the numbers make sense at the end of the day.
Working With The Right Team
One of the things that are important with these programs is that you have a realtor that understands the program. You also want to have a lender to help walk you through it so that you make the best choice on the property for the right price. That way, at the end of the day, we come out with a successful conclusion.
The Jumbo Loan
The next program we want to talk about is the jumbo conventional and construction loan. The jumbo loan program is for those people who are buying higher-end properties where the loan amount will exceed the conforming loan limits per county.
Each county has a conforming loan limit that is set annually by Fannie and Freddie on what they’ll purchase; anything over that amount falls into the jumbo category. For example, in San Diego County, the conforming loan limit is $879,750. Anything over that would be considered a jumbo loan.
The Pros And Cons
Some of the pros of the jumbo one-time closed construction loan are that you can have building costs up to $1.5 million and loan amounts up to $2 million. You can also do a primary or second home. In addition, these loans have no prepayment penalties. The key to these programs is qualifying.
On a primary residence, we’re going to require a 20% down payment. If it’s a second home, we’re going to need 25%. One of the things borrowers need to watch out for on these is we do need a 5% contingency to be built into the loan—or you need to have an additional 10% in reserves after closing. That money is there in case you run into additional things you were unaware of that you need cash to take care of.
In addition to that, you’re going to need at least nine months of reserves for principal, interest, taxes, and insurance. So while jumbo loans have a few more hoops to jump through and are a little tighter on some of the guidelines, they’re best for people who have more downpayment, higher FICO scores, and more reserves.
The VA And USDA Loan
Another loan program we want to talk about is both the VA and the USDA programs. If you qualify for a VA or USDA loan, then the construction and renovation programs work the same way. The VA loan is specifically for a veteran who has VA eligibility. On the other hand, the USDA program is for anyone who’s purchasing in a rural area.
If either of these situations fit you, you may want to explore the options of the VA or the USDA construction or renovation programs.
Choosing The Best Option
I hope this summary on construction and renovation programs was helpful. If you qualify for a regular home loan, then you qualify for one of these as well. If you’re exploring the option of taking out a construction or renovation loan—whether you’re a realtor, a lender, or a home buyer—I’d love to have a conversation with you.
If you have any questions, feel free to reach out to me and I’d be happy to connect. Don’t forget to subscribe to my channel so you never miss an episode of my show, and stay tuned to see what I feature next!