Are you thinking about getting a construction or renovation loan but aren’t sure what the process entails? In this video, I’m going to walk you through the steps it takes to get financing for one of these programs. We’ll look at everything from choosing your property to closing so you know exactly what to expect.
How To Qualify
Qualifying for a construction or renovation loan is much like a regular loan, though the process is a little different. The key to getting one of these loans approved is both the structure and the numbers.
It’s not as simple as just picking any property and renovating that home. It’s important that you purchase the property at the right price and have the right home improvements. This way, we’ll have a completed and after-completed value that makes sense and works with the loan program.
Choosing Your Property
The first thing we need to do is look at the type of property you’re purchasing and how much of a down payment we’ll be looking at. It’s important to work with an agent and a lender who understand all the numbers. This is because we’re going to be looking at after-completed value. We need to make sure you purchase the property for the right price.
As an example, I have a situation where the borrower purchased the property from the seller for sale by owner for $260,000. However, when we did the renovations and added about $30,000 in repairs, it only came out at $260,000. They were obviously overpaying for the property upfront and had to go back and renegotiate with the seller for $30,000 less.
It’s situations like these where most of these deals would fall apart at that point. This is why it’s important to find a property that you structure correctly. You want to make sure that your after-completed value is there and supports whatever price you’re paying for it upfront.
Working With The Contractor
The first thing you need to do after you have your offer accepted is to find and hire a general contractor. I have a package I’ll send to that contractor so that we can get some basic information and qualify that contractor. We want to make sure they’re licensed, insured, and bonded.
Next, we need a bid from them that’s broken down with labor and material on what work they’re going to be doing for this home. Once we have the contractor’s bid, we’re going to provide that to the appraiser. The appraiser can tell us what the after-completed value will be.
The appraisal won’t be ordered until we receive the contractor’s bid. One of the things that delay these programs is getting the contractor’s bid. That’s probably one of the longest lead time items. We can’t move on to ordering that appraisal and structuring the final loan until we have the bid.
Structuring The Loan
Once we have the contractor’s bid and we’ve ordered the appraisal, we can then structure the loan. We’ll do our disclosures and move on to underwriting the entire file. In a perfect scenario, you have your offer accepted on the property, you’ve been talking to a contractor, and now you have a bid.
We’re able to order the appraisal within the first week and can move on to underwriting and close within 45 to 60 days. In the underwriting process, the underwriters are going to verify your income and assets and credit for the final approval. It’s also at this point where the underwriter will look at the bid and the appraisal.
If everything matches up and is approved, we’re going to move to clear to close. Once we’re clear to close, it’s just like any other transaction. We’re going to do your loan documents, which you’ll sign with a notary. After that, we’ll close your transaction.
The difference between a conventional loan and renovation and construction loans is that we’re looking at the work that’s going to be done for the after-completed value. That’s really how we’re going to structure the loan, and it’s a critical piece of the whole transaction. It’s because of these additional steps that are required in the construction and renovation loans that it’s going to take a little bit longer—typically anywhere from 60 to 75 days to close.
We’re Here To Help
Whether you’re a lender, a realtor, or a home buyer, you want to work with somebody that’s experienced in this product. We can walk you through all those steps and get you to the closing table. So if you’d like to explore more about a construction or renovation loan, feel free to reach out and I’d love to have a conversation with you.
Don’t forget to subscribe to my channel so you never miss an episode of my show. Stay tuned to see what I feature next!
