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    Owning a home is one of life’s little joys. Finding that dream house at the right deal is a sure way to generate equity almost straight away. There are numerous credit facilities depending on individual credit scores but many of them do not cater for the lower tier comprising of people who have bad credit. The situation is even worse if the house is run down and in need of repairs to make it habitable.
    Buyers may be able to fund the purchase of a house through financial aid (regular fixed rate mortgage) from lenders but encounter untold agony with the renovations. Homeowners seeking loans to do renovations face the same dilemma although they can put up their houses as equity to guarantee the loans.

    The good news however is that the government through the FHA (Federal Housing Administration) has come up with a solution for prospecting home buyers. Fannie also has a similar program they call the HomeStyle renovation mortgage.

    So what is a Renovation Loan?

    A renovation loan is a mortgage program where the lender offer purchase and renovation financial assistance to home buyers all rolled up in one sweet deal. This mortgage facility is only available to home buyers who occupy the houses being bought and not investors. You can use home renovation loans to buy a single family home or up to a 4 unit multi-family house. 

    If you are hunting for a good bargain and looking to buy an old house and renovate it then this program is your best bet. The biggest problem is that the public is still in the dark about these wonderful lending programs. The standard FHA 203k loan can be used to make any construction changes or repairs in your home while the streamline FHA 203k loan only lets you fund projects that do not include modification to the structure. The HomeStyle renovation loan is also not restrictive in use just like the regular FHA 203k loan.

    The streamline 203k mortgage plan is only ideal for replacement or repairs on:

    • Porches Decks
    • Patios
    • Electrical
    • Plumbing Systems
    • Downspouts
    • Roofs and Gutters
    • Exterior Siding Windows and Doors
    • Cooling and Heating Systems

    Please note that these renovation loans can either be fixed rate or adjustable annually with 15 years and 30 years repayment period options.

    How to Acquire a Renovation Loan

    It is practically impossible to secure a home equity renovation loan without any equity. This has always been the problem for new buyers searching for beat down homes they can rehabilitate. To acquire a renovation loan especially through the FHA (203k) program, the borrower is required to prove that the renovation loan money will be or was spent on the house. Finding the best renovation loans is not easy for some people while for others it is just be a breeze. The first step is to hire a consultant to perform an appraisal on the property based on the expected worth after renovations are done.

    The size of the loan is also another factor to consider determining whether the construction loan for renovation should be obtained from a HomeStyle or FHA (203k) mortgage program. Note that with the FHA 203k loan you can get up to 110% of the cost of the house you want to buy and it only requires the borrower to put down 3.5% down payment. There are basically no minimum credit score limits in the FHA program making it ideal for individuals with not so great credit.

    On the other hand a HomeStyle renovation loan requires you to put down a down payment of 5% and grants you 95% of the total cost. This type is only favorable to individuals with good credit scores (above 640). It is for this reason that HomeStyle mortgages are available to investors while FHA loans are only for direct home occupants.

    Renovation Loans vs. Conventional Loans

    Renovation loans especially the FHA 203k loans are available even to people with bad credit while conventional loans require you to have an outstanding credit score. The interest rates are also lower in renovation loans as compared to conventional loans. This makes conventional loans not ideal for prospecting home buyers. The use of renovation loans has skyrocketed in Philadelphia and other parts of the US as well.

     

    References:
    http://www.nytimes.com/2013/01/20/realestate/mortgages-loans-for-fixer-uppers.html?_r=1
    http://www.nytimes.com/2013/01/20/realestate/mortgages-loans-for-fixer-uppers.html?_r=3
    http://www.interest.com/fha-loans/news/finance-fixer-upper/
    http://www.thetruthaboutmortgage.com/mortgage-loan-types-home-loan-types/
    http://www.homebuyinginstitute.com/mortgagetypes.php