By Mike Miles
I’m guilty of it too. I have no shame in watching several Fixer Upper episodes in a row … even though my gut tells me it’s a show my wife should enjoy more than I do. It’s kind of like when NSYNC was popular … how many guys listened to it when their other friends weren’t around? Life’s little guilty pleasures.
Watching renovation shows makes it easy to daydream and get excited about the idea of doing the same thing. However, there are obstacles such as finding the right contractor, deciding if a designer should be hired, timing of the project and access to cash.
Let’s focus on the last two obstacles mentioned. First … the cash. Not many new homebuyers have tens of thousands (or more) of dollars readily available to dish out to a contractor. In most cases, buyers have enough cash to put between 5 and 20 percent down at the time of closing with more funds locked up in retirement accounts. The solution is to finance the renovations, and this can be done with either a purchase transaction or a refinance transaction. My suggestion is to do it with a refinance, and I’ll explain my logic shortly.
Renovation loans are wonderful tools available to use. The most popular one is called the Homestyle Renovation loan. I’ve written about this product before. It’s a Fannie Mae product, so it follows conforming lending guidelines … meaning the maximum finance amount is capped at $453,000. The only downside to this product is that it’s not offered by many banks and underwriting takes longer. Why does it take longer? We must underwrite three things instead of just one. Normally we only underwrite the borrower(s) on the loan application. However, on renovation loans we underwrite the project and the contractor. It’s nothing to be afraid of, but it’s worth noting most of these loans require 45 to 75 days to underwrite versus a normal time of 20 to 30 days.
This leads me to my next point of the timing of the project. Many buyers are having a hard time finding the ideal home right now in this seller’s market. Either homes are gone too quickly, or buyers are being outbid by other buyers. Renovation loans are available for purchase loans, but I caution people from jumping at the chance to use the loan for the actual purchase. My reasoning includes the time required for underwriting and trying to get a seller to allow for an extended contract (for the longer underwriting) might prove to be difficult. In addition, I think it’s a good idea for buyers to learn about their new home before rushing to do renovations.
I encourage buyers to use a traditional loan to simply get into the house. Spend the next few months learning about the house while getting opinions from contractors/designers on the types of possibilities that exist with your ideal budget. Once you decide on the scope of work and people to do it, you can refinance your purchase loan into a renovation loan. Doing these loans as refinance transactions instead of purchase transactions gives you total control and avoids trying to rush the project.
Fountain Mortgage has been funding renovation loans for years. That kind of expertise is important to have to ensure your project turns into your own dream version of Fixer Upper.