Home Renovation Loan Process

Since COVID hit, the housing market has been crazy!  With housing in high demand, the competition is getting tough out there.  Buyers are looking for alternative ways to buy a home and many have turned to renovation financing.  In fact, our renovation volume tripled in 2021.  There are a number of reasons for this, but essentially, home renovation loans offer a number of advantages for want-to-be home buyers.

Here are some of the reasons more and more buyers are utilizing these loan programs:

Renovation Loan Advantages

• Available with all the major loan programs:   FHA, VA, and Conventional (including nonowner occupied properties).
• If a seller doesn’t want to accept the government financing because of repair concerns, the Renovation loan allows the repairs required by the appraiser to be done after closing.
• The “But Loan” or the ” I love this house but . . . ” statement is made by many potential home buyers.   Maybe you love the house but the kitchen is outdated or it needs a garage.  With the renovation loan, you can fix the “but”. You can have a contractor redo the kitchen or add a garage!  Renovation financing can make those homes you normally wouldn’t consider because of the “but” look a lot more attractive.
• FHA 203k renovation loans can go 110% loan-to-value, meaning the home can appraise for 10% less and everything is still ok.
• In the cases with a foreclosure and required repairs can’t be completed until after closing or utilities can’t be turned on, renovation loans can help save the day.

The bottom line is that with renovation financing, home buyers have more homes to choose from.  Which makes finding one a much easier task!

The Step by Step Process

1. Get Preapproved – The home buying journey should always start with the financing side of things.  This is where we look at all your info and scenario and figure out what the best financing options are.  Click here to get started
2. Find A Home – Once preapproved, it’s best to solicit the help of a good Realtor.  They will be instrumental in helping find the right home.
3. Accepted Offer – After the home is selected, things will get negotiated with the seller.  The accepted offer comes when both the buyer and seller come to an agreement.
4. Obtain Bids – This can be the longest part of the process, so its important to start immediately after the offer is accepted.  With this step, buyers meet with a contractor and come up with a bid for all the work they want to do on the home.  Note: The contractor must fill out this packet when they submit the bid
5. Appraisal Ordered – Once we have the bids, we order the appraisal.  It typically takes 2 weeks for the appraisal to come back.
6. Bids Adjusted  – Many times once the appraisal is back, there is some tweaking that needs to happen with the bids.  For example, if the appraiser sees some peeling paint that needs to be addressed, they will require it on the appraisal report.  We will then go back to the contractor and have those missing items added to the bid.
7. HUD Consultant Assigned – A necessary step only if the renovation projects exceed $35,000 or there is structural work being done.   In those cases, a 3rd party consultant is brought in to review and oversee the project.
8. Loan Closes – This is where the Seller gets their funds, Realtors get paid, and the Buyer gets the keys to their new home!  At this point the buyer is more than welcome to move into their new home.
9. Initial Funding – This does vary by loan program but, generally speaking, shortly after closing the contractor will receive payment for half of the project.  This get’s the contractor the money they need to get started on everything.
10. Work Begins – At this point, the loan is closed and the contractor has some initial money.   They can now get in there and start pounding some nails!  With most of the programs, the contractor has 6 months to complete the project.
11. Draws – If there wasn’t initial funding the contractor will be able to take draws.  What that means is that after they complete part of the project, they can request payment for that portion of the bid.  An inspector is sent out to verify that work is done and then the contractor is paid out for that portion of the work.
12. Final Inspection – Once everything is done, we do a final inspection to verify the project is complete.
13. Final Payments – The last payment is made to the contractor.  In many cases, there is often some money left over in the loan that wasn’t used.  Any left over funds are applied back on the mortgage reducing the principal balance owed.

At the end of the day, there are certainly a few more steps involved when it comes to buying a home with a renovation loan.  However, it’s not that bad. Our average close time for a “normal” mortgage is 27 days. Our average close time for a “renovation” mortgage is 37 days.  They do take a bit longer but only a few weeks. In many cases, the benefits far out weigh the extra time. For questions about renovation financing

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