Maybe you’re buying a brownstone that needs serious work before you can move in. Or maybe you already own your home, and want to put in a new kitchen to raise the property value. Either way, you know it’s going to take some serious cash.
Renovation loans are an option, but are they the best option? We asked two of our Brownstoner Services pros, Barry Koven and Adam Dahill, to walk us through the pros, cons, whys and hows of getting a renovation loan for your home project.
Barry Koven, Renovation Loan Specialist
Renovation loans can be used for a home being purchased or one that’s already owned. With a renovation loan, you can borrow money to fix up a home you already own. If you’re buying a home, you can add the repairs into the home mortgage with one loan, one down payment and one rate for both the purchase and renovation amounts combined.
Renovation before and after photos from Sweeten.
In most cases you can use it on a home in any condition, with no minimum or maximum amount of renovation required (subject to loan limits). You can use it for anything from a small job to a complete gut renovation. One important thing to note is that the loan is based on the value and usage after repairs have been made.
In most cases you can change the Certificate of Occupancy and current usage. Additionally, many of the older homes in our area have legal or title issues, such as no Certificate of Occupancy, violations, or illegal rental units. All of these items could prevent the home from getting approved for a conventional mortgage. In most cases, with a renovation loan, you can close on the loan now, as long as the work being done will solve the issues.
Adam Dahill, “Mortgage Master”
I think it’s best to identify what type of work is needed when approaching the topic of renovation loans.
Renovating a new habitable property
If a property is habitable and can qualify for a traditional mortgage — as opposed to a “shell” of a building — I discuss low down-payment programs with my clients. If they can handle 10 percent down on the property, or can qualify for an FHA loan, I explain that it’s sometimes best to keep the rest of the cash they have, rather than put down a larger deposit. That way, they can finance the renovation themselves on their own timeline. Otherwise they will have to deal with a draw schedule, where the bank comes up with a detailed payment plan of when to disburse funds to the contractor.
This may seem counter-intuitive. Many people believe they have to put 15 or 20 percent down on a property, but that isn’t necessarily the case in the Brooklyn market. There are loan programs that allow 10% down, up to $2 million, even for two- to four-unit, owner-occupied homes.
Renovating a new shell property
In the cases where the property is a full shell and can’t qualify for a traditional mortgage I have a network of lenders that I can approach for acquisition and construction loans.
Unfortunately, the problem that arises with these types of loans is that, more often than not, you need to have your plans ready to go before you close on the property. Many sellers in today’s Brooklyn market are not always ready to wait or deal with taking a chance that your loan will come in. (There are non-contingent contracts, but that subject could fill a post on its own.)
The bottom line is that acquisition and construction loans are difficult to pull off unless all parties (including the seller) work together and with a measured timeline for closing. The fact of the matter is that if a property is priced correctly and needs work, there may be a good chance another buyer who can close for cash will ultimately win the deal.
Renovating a property you own
If a client already owns their property and has sufficient equity, a regular cash-out refinance for home improvement may make the most sense. Basically, you negotiate a new mortgage that includes the amount you want to take out in cash. As long as mortgage rates are favorable, this may be a better option than taking out a second loan on top of the mortgage loan. I try to find the simplest path to get my clients the money they need to do the work they want to.
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