What To Expect When Getting A Renovation Loan?

Whether a homeowner or a real estate investor, you greatly benefit from a renovation loan. The point is if your property is used as your primary residence or is a rental property, a renovation home loan is the best option for refurbishing and repairing the property. Remember, however, this loan type is not for everyone. 

In the case of a renovation loan, you need to understand what to expect so that you can choose the right loan from the various options available and make informed decisions. Follow this guide to get completely acquainted with the process of securing a home renovation loan. 

Overview of Renovation Loan 

• What is a Renovation Loan?

Home reno loans allow borrowers to pay for the cost of renovating or repairing their property. In most cases, lenders offer the loan amount based on the property's after-repair value (ARV). ARV, in other words, is the prospective value of the property after it is repaired and renovated.

• Home Projects Covered By This Loan

Lenders offer renovation loans for a range of repair work. They review the project details before agreeing to pay the funds. Not all kinds of home improvement projects, such as addition of a swimming pool to your property, are covered under a renovation home loan. 

Some of the projects covered home reno loans are - 

• Roof and gutter replacement.

• Purchasing and adding new appliances. 

• Window replacement.

• Adding new rooms 

• Adding a new floor

• Structural repairs

• Plumbing,  cooling, and heating systems replacement or upgradation.

• Home insulation 

• Major remodeling

In most cases, any home improvement project that will take more than six months to complete can be considered for a renovation loan.

• Types of Loan

1. Personal Loans

2. Home Equity Loans

3. Home Equity Lines of Credit (HELOCs) 

4. Cash-Out Refinance

5. FHA Rehab Loans

To learn more about each of the renovation loan types, click here.

• How does a Renovation Loan Work?

Renovation loans do not work the same way as conventional loans. Here are the differences between the two types of loans -

1. For a renovation loan, the lender will appraise the property to estimate the ARV.

2. Real estate investors can apply for a loan after the appraisal to cover the funds for buying the property and cover repairs and renovations.

3. For homeowners, there are the options of getting the entire fund upfront on approval or getting a part of the fund. On the other hand, investors first receive funds to the extent of buying the property or covering the property's purchase price upfront. The funds for renovations and repairs are held generally in escrow accounts and given in installments.

Advantages and Disadvantages of Renovation Loans

The advantages of renovation loans are - 

• Investors Get to Own Properties at Lesser Price

 As an investor, if you are looking to buy a property at a price less than the market value, one of the best alternatives is to apply for a home reno loan for a distressed property. These are properties that require renovation and repair. Based on the condition of the property, you are likely to get a lower price for it. A traditional home loan for a worn-out property is not easy to get. Once the renovation is completed with the loan money, you have the option to put it up for rent, which will help you earn a rental income per month, helping you pay the interest of the loan, too. 

• Home Reno Loan Terms Are Flexible

Loans for home renovation usually have flexible terms compared to traditional loans. If you take a loan from a private lender, chances are high that the terms are flexible. Lenders can create personalized loan terms if you work on developing a close relationship with the lender. 

• Renovation Financing Can be Used to Customize The Property

With the help of these types of loans, the property improvements can be tailored to your liking. You can add new rooms, build an additional bathroom, add a floor, redo the flooring, etc. In most cases, such loans have no limitations, and as long as the renovation project meets the loan's requirements, it uniquely appeals to buyers. 

The disadvantages of a Home Reno Loan are as follows - 

• Your Credit Score and History Have to be Impeccable 

To be eligible for a homestyle renovation loan, you must have a credible credit score and history. You also need to prove you have a sound income source. Without these two bases, you cannot qualify easily for a renovation loan.

A worn-out property that requires large-scale repairs may not interest a lender because the risks are high. The chances of earning good income or profit for such properties are usually low. If the borrower's credit history or score is low or the borrower does not earn a stable income, their risks are even higher. 

• Before the Loans, the Property May Require an Appraisal

Added to ARV, some lenders may require the property to be appraised so the lender can be sure about the property's estimated value. If the property requires many repairs, the appraiser may come back with a report suggesting the investment is not worth it. All of this can be time-consuming, and finally, you may not get the desired funding.

• You Need to Submit Approved Construction Plans

Most lenders in the case of loans to remodel a home will ask for detailed approved construction plans before they decide to fund the project. It means that if your pans are not drawn up professionally, you will need to get this ready and also hire contractors to provide accurate estimates of the project.

Do You Need Real Estate Experience For A Renovation Loan?

Having some real estate experience before getting a home renovation loan helps. However, this experience is not mandatory. The basic criteria for a renovation loan are a good credit rating, a stable source of income, and plans ready for the renovation. 

If the property is distressed, you may still find getting a renovation loan to cover all repairs challenging.

If you have some real estate experience, getting a loan may be easier. Lenders might feel confident about giving you the loan because of your experience and understanding of the risks associated with such projects. If you have a success record, it can add value for the lender and make it easy to get the loan. Also, showcase your past real estate investment experience to impress the lenders.

How Renovation Loans Differ From Other Home Loans?

• Difference between HELOC or Home Equity Loan & Renovation Loan

HELOC or Home Equity Loan is determined by the property's equity. The investor's credit line is considered on the investment property's equity in renovation home loans. Your whole investment portfolio can be considered, not just your primary home for the loan. 

• Difference between Personal Loans or Credit Cards & Renovation Loan

Personal loans and credit cards usually have lower limits. Renovation loans usually need to be bigger because they cover expensive renovations. To top it off, the interest rates are higher on personal loans and credit cards.

• Difference between Conventional Cash-Out Refinance & Renovation Loan

In the former, the loan comes with a lump sum amount of money. To qualify for this loan type, you need to have a low loan-to-value and a sound credit score. In the case of a renovation loan, the funding secured is higher than conventional cash-out refinance. 

What To Consider Before Getting A Renovation Loan?

Other than comparing the pros and cons of renovation home loans, you need to consider certain other factors to get a loan.

• The projected value of the home after the project. Will it increase or decrease? Will the planned renovations increase the property's value? Otherwise, you can end up in a financial loss. Also, your time would be wasted considerably.

• Will the project help save money? That's the next question you should ask. Particular renovations are not worth the money you are planning to invest. Ultimately, you need to consider if the ARV or the value of the property will increase.

• Will this project be profitable? You need to assess whether the repairs and renovations will yield profits or not, considering the expense. If the expenses are excessive, you might want to reconsider the loan.

• Is this a rushed decision to renovate? With a loan for home renovation, things can be pretty slow-paced. Therefore, if you are planning a quick repair, this loan type may not work for you. Renovation loans take time as the lender will ensure due diligence to be sure that their funds are secure and used for the proper purposes.

Factors That Can Affect The Loan Calculation Process

Whether it is the existing price of the property or the renovation project type, the loan calculation process is affected by different factors. The following are the foremost factors that are considered for calculating the amount of a loan to remodel a home -

• Local Regulations: Certain limitations or restrictions will be placed by the city or the town administration related to property or land development. For example, some local zoning regulations may not allow certain kinds of renovation. In such cases, your project will not get financed.

• Home Inspections: Most lenders will have the property inspected by professionals to understand the actual condition of the home. Lenders might not be so forthcoming with funds for properties that need large-scale renovations or repairs. If your proposed plans do not feature details addressing the serious issues, the lender may not be interested in offering the loan for home renovation. 

• Cost of Repair: The estimates from your contractors for the repair will be considered. You must ensure the estimates are accurate to get a fair deal from the lender. Underestimation of costs can put the investment at risk. Hire a professional for accurate estimation of repair costs.

• Negotiated Prices for Certain Services: In the entire project, you need to explore opportunities wherein you can get a good deal or negotiate a price offer for certain kinds of services. For example, the supplier might offer a good discount for bulk purchases of materials.

Doing It Yourself Versus Choosing A Contractor

Lastly, you must choose between doing the work yourself or appointing a contractor. You can undertake the work if you have the expertise and experience in this field. Else, it is best to leave the job to professionals. Remember, if you do not have any idea about a home improvement project, you may end up spending comparatively more than hiring a contractor.

Find the Best Renovation Loan Lender at Total Mortgage!

Assessing home renovation loans and trying to find the right one for your investment property? Consider all available options, as there are different schemes, and each has its own set of pros and cons. A well-conducted research backed by data will help you choose the correct one for your project. 

Contact Total Mortgage for renovation financing solutions and services designed for property investors. We will help you find the home renovation loan that best aligns with your investment goals.