Renovation Mortgage Loans

Renovation Mortgage Loans For Purchase and Refinance

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss renovation mortgage loans for purchase and refinance. Have you ever looked at a home and said “I love the neighborhood“ but the house is so outdated you would have to dump too much money into it that you don’t add it to your shortlist?  It is probably because you were not educated on the FHA 203K renovation mortgage loans.

FHA, VA, Conventional Renovation Mortgage Loans

In this blog, we are going to discuss the types of renovation mortgage loans available for homebuyers buying fixer-uppers. FHA, VA, and conventional mortgage renovation loans are now back on both purchase and refinance transactions. Gustan Cho Associates has no lender overlays on renovation mortgage loans. The guidelines on FHA, VA, and conventional renovation mortgage loans are the same as the standard FHA, VA, and conventional loans.

Can a Mortgage Loan Be Used For Renovation?

One of the most frequently asked questions our team at Gustan Cho Associates gets is can a mortgage loan be used for renovations. Dale Elenteny, a regional managing director and senior loan officer at Gustan Cho Associates said the following about the newly launched updated FHA 203k Renovation loans.


How Does 203k Renovation Mortgage Loans Work?

According to Christian Sorensen, Regional Wholesale Account Executive at Equity Prime Mortgage, an FHA 203K renovation mortgage loans gives you the ability to purchase a home in AS IS condition, update it and customize it to your liking, and have the renovations included in your FHA Loan.  If you know the market you are looking into and do your research, this product could potentially provide you with instant equity in your new home!  The FHA Loan is offered in either a “Streamline” or “K”.  We will also be discussing the difference between the two options.

The Mortgage Process on FHA 203k Renovation Mortgage Loans

With the 203K Renovation mortgage loans, you have the ability to take a home in AS-IS condition and customize it, modernize it and update it. One loan, one rate, and one payment are all under FHA financing requirements. All work, optional and required, is completed after closing.

What Options of Renovation Mortgage Loans Do Borrowers Have?

The FHA 203K Loan is how you as a consumer can use it to your advantage!

What Is Structural Work On A House?

Structural work is considered as remodeling or renovating load-bearing walls, roofs, foundations, supports, structural beams, columns or any item of structure in the house. When applying for an FHA 203K Streamline loan, it will not allow you to perform structural repairs.  The loan also has no minimum requirements in terms of cost for the renovations you are looking to perform, however, you are capped at a limit in renovations of Thirty-Five Thousand Dollars.  It is also important to note that adding a pool in your backyard or enhancing the landscaping is prohibited.

Full FHA 203k versus Streamline 203k Renovation Mortgage Loans

When considering the FHA 203K loan, that too prohibits structural work to be financed in the loan.  A difference between the FHA 203K opposed to the 203K Streamline is the FHA 203K loan has a minimum requirement of Five thousand dollars in renovations.  The limit on an FHA 203K loan falls under the maximum loan amount for FHA loans.  With this product, you will also be required to include HUD Consultants in your project.  

FHA 203k Streamline Renovation Mortgage Loans

With the limited 203K or Streamline product, along with not allowing structural remodeling, pools, or landscaping purchase contract will be AS IS. The most common types of renovations performed with the use of this loan product include, but are not limited to updating kitchens and bathrooms, and flooring.  When updating your kitchen keep in mind, free-standing appliances are an acceptable expense.  

HUD Guidelines on FHA 203k Renovation Mortgage Loans

When using a “standard” FHA 203K loan, let’s recap some of the key factors. First and foremost a HUD consultant will be involved in the project. They will be the project manager and assure there are no health or safety issues during the renovation.   There are specific renovation projects that are not allowed including all structural renovations and the addition of pools or landscaping.  With that said, if the home you purchased already has a pool, you are allowed to do work on it to make sure it is fully functional.

What Type of Homes Are Eligible For Renovation Mortgage Loans

And like the “limited” streamlined product you can use funds from this loan for free-standing appliances.  Both products have the same process in closing.  When you sign the papers and take ownership of the house, you will receive the funds for the renovations.  Single-family homes, properties with 2 – 4 units, and manufactured homes are all eligible under both products, and terms of 15 years, 30 years, and adjustable rate mortgages are available.  

HUD Loan-To-Value Guidelines on FHA 203k Renovation Loans

HUD allows FHA 203k Loans loan to value cap at 110% loan-to-value cap on purchase and refinance transactions. For your sake, I hope you never were in a situation where the appraised value comes in under the purchase price, and had to walk away.  Whether you were unable to pay the difference as a down payment or the seller refused to lower the price, those situations tend to “kill” the deal and you have to restart the whole process over again.  WHAT A PAIN!!!!   A key option when using the FHA 203K loan is the 110% LTV after the completion of the renovations. 

Who Hires The General Contractors and The Construction Crew on Renovation Mortgage Loans 

Let’s look at an example of this work: Let’s pretend you wanted to buy a home for $500k and wanted to update the master bath and that was going to cost $36k. The total of the 203K loan would be $536k. However, your original appraisal came in at $453,800.  Your loan officer could request an estimate or bid from a licensed contractor and order a separate appraisal for the “After Completion Value”.  The appraiser comes back with a new value after completion of $490,800.  Take the new appraisal and multiply it by 110% ($490,800 X 110%) = $539,880.  You are eligible for the complete loan including renovations!!

In conclusion, do not be afraid to ask your lender what option is best for you to achieve the end result you are looking for.  There are so many loan options available to consumers, be sure to pick the right one.  Asking the right questions and doing your research will help get you into the home of your dreams!

This blog on renovation mortgage loans was updated and published on October 9th, 2022.

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