Renovation Financing: A Strategy for Today’s Hopeful Homebuyers

Buying a home in today’s market is not easy. But there is still opportunity, and a renovation home loan might be your competitive advantage that others may not know about. 

There are a lot of complex factors effecting the market right now. Rising home prices and interest rates are having an impact on the amount of house that hopeful homebuyers can afford. Some are considering hitting the pause button on their home search and this may work to your advantage once you understand how a renovation loan works for you.  

A renovation loan allows you to combine the purchase price of your home and the total cost to renovate it all in one mortgage loan. Buyers love this because they get to determine what they want done and choose their favorite contractor to do all of the work. Sellers love this program because they do not have to spend money on a house they are selling, and all the work is completed after closing. The seller is never required to fix anything prior to closing. Realtors love this program because they do not have to worry about closing delays caused by repairs the property inspector or appraiser may require. All repairs and renovation work are done after the transaction closes. 

You are no longer forced to compromise between the right location and the perfect house.  Now you can turn the right location into the perfect home, but there are additional steps that you need to take. For starters, get pre-approved with a good renovation lender because they will be able to guide you all the way through the following process.  

  1. Find a home in the neighborhood you want to live in. Preferably one that is priced low because it needs work. Often, this is the type of property investors look for because they can make money on them. Most home buyers do not look at these because they don’t know how to buy them. For you, this would be a perfect opportunity. By cutting out the investor, their profit would be your added equity.  
  2. Walk through the house and see the potential, not the ugliness or the problems. Imagine what it could be, not what it is now.  
  3. Write a contract to purchase the home in its “as-is” condition. Have the lender provide information for the seller explaining the benefits of a renovation loan. Include this with your offer.  
  4. Property inspection and contractor selection. Always have the property inspected by a reputable property inspector. You want them to find everything that needs fixed or repaired. Once you know what needs to be done, have your favorite licensed and insured contractor give you a detailed estimate for the required work to be done and the work you would like to have done. 
  5. Appraisal process. The lender will send the detailed contractor estimate to the appraiser and the appraiser will let you know what the house will be worth after all renovations are complete.  
  6. Loan approval. The lender will underwrite the file and make sure your financial capacity and the property meet the requirements of the loan program. When complete, they will issue a Clear to Close. 
  7. Loan Closing. This is the event you have been waiting for. You sign your closing documents; all funds are disbursed, and ownership is transferred to you. The funds for renovation will be deposited in an interest-bearing trust account. 
  8. Renovation can begin. You can move in immediately if you choose or wait for the work to be done. Your contractor needs to begin work within 30 days of closing and needs to be completed on the timeline they agreed to in their estimate. Depending on the amount of work that needs to be done, this should be less than 6 months. Draws can be paid to the contractor as they complete each stage of work. 
  9. Once complete, the lender will do a final inspection to make sure everything was done as proposed to the appraiser, a final title update will be done and the remaining funds in the renovation escrow will be disbursed.  
  10. Enjoy your fully renovated home! 

In a competitive market? You can work with your agent and your Loan Officer to deliver a more attractive offer with a renovation strategy and avoid the dreaded bidding war. Stand out from the crowd by submitting an offer using a renovation loan. Your seller can rest easy knowing they can sell the home “as-is” and avoid negotiations down the road.  

Pro tip: Don’t be afraid to offer a little bit more than asking price and have your lender provide an explanation about renovation loans for the seller. 

Recently it has seemed that competition is starting to cool down a bit, but there are still many markets and neighborhoods with very few choices. Renovation financing allows you to look at homes you may have otherwise bypassed.  

If a house is listed as-is and needs major repairs, it may be aimed at investors who plan to flip the property. A buyer who requires financing to buy a home may not qualify to purchase the property under other traditional loan programs. But with renovation lending, you can buy the home and obtain financing to make those repairs. 

You could also take a look at homes with little to no curb-appeal knowing you’ll have the funds to spruce it up. With a little creativity and vision, you can turn it into the best house on the block.

Pro tip: Look up listings that say, “Cash Only” or “Fixer-Upper” or “As-Is”. 

Let’s be honest, purchasing a home can be scary. It’s a huge investment that will have an impact on your financial future. Even if you have a thorough home inspection, you may never know what will need attention down the road. Renovation financing can allow you to make small to large repairs or upgrades on the home and feel confident in the current state of things.  

A home is our safe place, where we make memories and create traditions. You’ll feel much better knowing you were able to make any necessary repairs/renovations to it early on. 

And if you’re going to tear down a wall or replace the roof anyway, why not have a well-thought-out plan that includes an experienced renovation team and a licensed contractor to help ensure that it happens on time and within budget?  

Jim Nunn, SVP of Renovation Lending with Certainty said, “It is frustrating to hear people say, I wish I would have known about this program before I bought this house.” Nunn says it is frustrating because so many people are forced to compromise, and they end up buying the wrong house. “Once they compromise on location, there is not much we can do to help them.”  

Pro tip: Make sure you work with an experienced renovation lending team who can help coordinate with contractors and know the process. 

You’ve heard it before, but we’ll say it again: Location, location, location! If you’ve fallen in love with an area but couldn’t find your dream home there, determined homebuyers can open themselves up to a new pool of properties that were previously off-limits with renovation financing. You can buy the house in the neighborhood that needs some TLC and renovate it to match your personal tastes.  

You don’t have to find the perfect house; you just have to find a house in the perfect location… and then you can turn it into your perfect home. 

Pro tip: Location is the most important thing that we cannot change. 

Renovating a fixer-upper could be one of the fastest ways to build equity because you are making improvements that add value to the property. Here’s how it works: 

When you apply for a renovation mortgage, your lender will need an estimate of the value of the home after the renovation has been completed. This is known as your home’s “after renovation value” and is based upon the improvements that you are planning to make to your home. Your appraiser will use an “as-completed” valuation when looking at the property and will use your renovation plans to evaluate what the value of your home will be after upgrades and repairs. 

Pro tip: Some projects can give you the most bang for your buck, including landscaping, installing energy efficient windows, outdoor improvements such as adding a deck, or kitchen and bathroom remodels. Not only will improving your home allow you to build equity quickly and efficiently, but it can also make your life more comfortable. Win-win! 

As more inventory hits the market and interest rates diminish buyer competition, home sellers may find themselves in a less advantageous position than before. As bidding wars begin to subside, homebuyers will be less likely to make major concessions to stand out.  

But sellers of a less-than-perfect house may not have to lower their sales price just yet. Renovation loans allow the seller to list the home in its “as-is” condition. They don’t have to make major repairs or renovations to the house to get it ready for the market. They can also avoid selling to a cash investor by accepting an offer from a homebuyer looking to make the house their home.  

Pro tip: As the seller, you may choose to do a renovation refinance and renovate the home prior to selling. The benefit is, you get to live in a fully renovated home until you are ready to sell. When you are ready to sell, your home is much more attractive and valuable.  

A renovation loan can open up possibilities to help current homeowners, homebuyers and sellers. Even in a difficult market where inventory is low, renovation financing can help you turn a fixer-upper into your dream home.  

Speak with your local Loan Officer about your goals so you can develop a winning strategy. It’s important to have a pre-approval in hand and be ready to make your first offer when you find the right location for your renovation financing.  

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