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Taking a Renovation Loan for DIY Repairs

A fixer-upper loan offers borrowers a viable financing technique that simultaneously provides the capital:

  1. To purchase (or refinance) a property and,
  2. To pay for the costs of anticipated renovations.

While it may seem as if this type of mortgage is unnecessarily complex, the fundamental reason the renovation loan was developed was to meet the growing demand for dual-purpose financing – funding that helps buyers and borrowers purchase a property in need of work (or TLC).

Renovation loans differ from lender to lender but are used – at least primarily for borrowers who want to fix their current home or use the money when buying a home that needs repair.

While some renovation projects create living space to meet a homeowner’s need, there are those renovations that are required to simply ensure a home remains safe (and thus habitable) and meets local building and code requirements.

Either way, it is critical to remember that one’s home is an investment.

  • An investment in the way in which you and your family live.
  • An investment in one’s financial future due to real estate’s inherent nature to appreciate in value over time and the ability to pay down debt over time.

If an investment remains neglected, its payoff is likely to be minimal, if anything at all. The same is true in reverse. An appropriately maintained property will help maximize appreciation and provide function and comfort to those that matter most.

From a larger perspective, the proper maintenance of real property will also tend to help raise the current neighborhood standards, which typically will lead to increases in property values across the board as the neighborhood attracts more interested buyers and commercial/residential tenants.

Housing stock is aging into disrepair, with the median age of a home nearing 40 years old.*

Source – FNMA.com

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Are You a DIY-er?

The phrase ‘Do it Yourself’ (DIY) hit mainstream America’s vernacular during the I Love Lucy era (i.e., the 1950s-60s) when home improvement became popular, according to the National Building Museum. As veterans returned home from WWII, many had either learned new skills (while serving) or simply became interested in the new-fangled concept of the DIY. The DIY market, which is a part of the broader market of home improvement, has put on quite a show in terms of growth in the past few decades –

The DIY slice of the industry has expenditures that near $300 billion (2020). The industry is expected to see rapid and expansive growth (predicted to be at 4.5% (Compound Annual Growth Rate (CAGR)) through 2027. Market growth is driven by a variety of factors, but most likely, the most substantial push came by way of the increase in e-commerce channels.

Source – www.gminsights.com (5/2021)

The global home improvement market exceeded USD 762.9 billion in 2020 and will grow at a CAGR of more than 4.3% up to 2027 with rising trend for energy-efficient and luxurious living space.

Source – www.gminsights.com (5/2021)

What Type of DIY-er Are You?

Do-it-yourselfers often choose to take on projects as it helps save money and offers them an opportunity to learn a brand new skill while personalizing a project.

The Professional

How you answer these questions will help you determine if you are a true professional DIY –

  • Do you have dedicated space in the garage to fulfill your passion?
  • Do you have a workshop?
  • Do friends and family often ask to borrow one of your power tools?
  • Do you Maintain a specialty shop – i.e., ETSY

The Weekend Warrior

Weekend warriors are those who always have a list of home projects that’s never-ending. Many weekend warriors buy diamond-in-the-rough real estate properties in need of TLC and updates, while others refine a home to meet their needs with their weekend DIY warrior skills. A weekend warrior may choose to refinish the floors or even replace tile in a bathroom – tackling more home improvement projects rather than craft-like projects.

Financing Improvements

The most cost-effective way to fund a DIY project is to simply pay cash. But, if a DIYer lacks the money to complete more immediate repairs – like replacing a roof that is near worn-out, it is imperative to seriously weigh the cost of borrowing the funds required to complete the needed repair against the cost of delaying the repair.

If you choose to borrow, be sure to find the most cost-effective way. Be cautious when using easy-to-access cash advances through credit card offers due to the exorbitant interest rates/fees/penalties typically associated with this form of credit usage.

Many banks and lenders offer the capital you will need to fund a DIY project with very reasonable financing terms; however, the type of financing that is best will depend on your financial scenario, plus the amount of capital you need to borrow.

DIY Loan Options

DIY and renovation loans are available through conventional sources or government-backed programs. A renovation or DIY loan is structured as follows –

  • A specified amount for the home purchase/refinance, plus
  • a specified amount that is earmarked for the cost of renovations.

Each program is structured to meet lender guidelines, but note, lenders typically hold back the amount earmarked for repairs in an escrow account as a way to maintain control over the construction process – ensuring its completion. The lender then disburses funds throughout the project in various phases. Many lenders set up what is known as a ‘contingency reserve.’ This is a predetermined amount of money that is set up to cover what may be unanticipated renovation expenses – it’s a protection for both the lender and the borrower on different levels.

Be mindful that renovation loans may have additional fees (when compared to more traditional home mortgages) due to the required inspections & disbursements required to manage the funding process during the construction phase.

FNMA’s HomeStyle® Renovation Loan

FNMA’s HomeStyle® Renovation Mortgage is a conventional loan designed to help homebuyers (as well as existing homeowners) fund both the purchase/refinance and the renovation costs – upfront! in one solitary loan.

Source – FNMA.com

The HomeStyle Renovation mortgage balance will be contingent on either –

  • the purchase price of the home with the costs of renovations, or
  • the expected final as-is value of the property with completed renovations – whichever is lower.

FNMA’s renovation loan offers standard pricing (with rates lower than most HELOCs, credit cards, or personal loans) and simple execution on the lender’s part. It can be used for any renovation project. Check out FNMA’s consumer tips.

Loan Features of FNMA’s HomeStyle® Renovation Loan

Types of Loans Purchase or Cash-Out Refinance (Limited)
Loan Terms 15- and 30-Year Fixed or ARM
Required Down payment Minimum down payments of 3%-25% depending on the property type, income, and loan type.
Property Types 1-to-4-unit homes, Condos, Co-ops, and Manufactured Homes (Limited to a lesser of $50,000 or 50% of the finished appraised value).
Occupancy Requirements 2-4-unit properties must be O/O. It can be used for one-unit investment properties or one-unit second homes.
Loan-To-Value (LTV) Ratio  Up to 97% LTV contingent on property type (105% combined/Community Seconds® financing)
Loan Requirements 
    • 620 Minimum Credit Score -May go higher depending on DTI & down payment
    • Renovations must be completed within 1 Year
    • A licensed contractor must do renovations
    • (DIY option allowed if the repairs are less than 10% of the final value)
    • LTVs >95% – Buyer must complete homeownership education

FHLMC’s CHOICERenovation® Loan

Another conventional DIY home loan option is from Freddie Mac. Both homeowners and homebuyers can rehab, repair, renovate or restore an existing property by combining the home/refinance purchase with the renovation funds in a single mortgage using the CHOICERenovation® Mortgage.

The CHOICERenovation® uses the same basis as FNMA concerning determining the maximum available loan. It will be based on the lower of the expected value of the property (with completed renovations) or the total purchase price (as is) plus the estimated cost of repairs and rehabilitation.

Loan Features of FHLMC’s CHOICERenovation® Loan

Loan Types Purchase; No Cash-Out Refinance
Loan Terms 10-, 15-, 20-, and 30-year Fixed or ARM
Down Payment Minimum down payments – 3%-20%, depends on the property type, income, and loan type.
Property Types 1-4-Unit Homes, Condos, Co-ops, and Manufactured Homes (Limited to a lesser of $50,000 or 50% of the finished appraised value).
Occupancy Requirements 2-4-unit properties must be the borrower’s principal residence. Borrowers can use the FHLMC’s loan for 1-unit investment properties & 1-unit second homes.
Loan-to-Value (LTV) Ratio  Up to 97% LTV which depends on the type of property (up to 105% when paired with Affordable Seconds® financing)
Loan Requirements 
  • 620 Minimum Credit Score (May be higher, depending on DTI & down payment
  • Renovations must be completed within one year
  • Renovations/repairs must be made to an existing dwelling
  • The borrower can act as a contractor if licensed

The FHA’s 203(k) Loan

The FHA 203(K) loan is a government-insured loan that offers financing to help fund renovations and repairs to existing homes. Because the 203(K) loans are insured by the federal government, lenders offer more lenient guidelines and are more willing to provide funding in riskier scenarios. An FHA home loan often helps when the property’s condition does not meet the minimum requirement for traditional lenders.

With federal insurance comes federal guidelines that may limit the types of renovations. For instance, the FHA 203(K) won’t fund renovation loans to install a swimming pool which is recognized to be a ‘luxury-type improvement.’

Additionally, homebuyers must work with a licensed contractor or professional regarding the details of the renovation’s costs. DIYers can take advantage of this loan but will need to provide detailed project lists and permits, etc., in support of the renovation. The government offers two types of 203(K) loans –

  • The limited – for loans of $35,000 or less.
  • The standard – for more extensive and costly renovations.

Loan Features of FHA’s 203(K) Loan

Loan Types Purchase; Refinance
Loan Terms 15-, 20-, 25- and 30-year Fixed or ARM
Down Payment 3.5% minimum down payment with a credit score of 580 – lower scores (500-579) have a minimum of 10% DP
Property Types 1-4-Unit Homes Approved Condos and Manufactured Housing
Occupancy Requirements Borrowers must be owner-occupants.
Loan-to-Value (LTV) Ratio  Up to 96.5% LTV for Purchases; 80% maximum LTV for Refinances
Loan Requirements 
  • 500 minimum credit score (580 if < 10% down payment)
  • Amounts subject to FHA loan limits; 203(k) limited < $35,000
  • Renovations must be FHA approved
  • Standard 203(K) borrowers must work with a 203(k) consultant. This is optional for 203(K) limited loans.

The VA’S Renovation Loan

The VA – the United States Department of Veterans Affairs offers another government-backed loan to help borrowers with DIY financing. VA loans are available to those current and previous members of the military who quality.

Loan Features of the VA’S Renovation Loan

Loan Types Purchase; Cash-Out Refinance
Loan Terms Fixed and Adjustable-Rate Mortgage (ARM)
Down Payment As low as 0%
Property Types 1-4-Unit Homes And Condos
Occupancy requirements Borrowers must be owner-occupants.
Loan-to-Value (LTV) Ratio  Up to 100%
Loan Requirements 
  • No minimum credit score (Although lenders often want a score > 620)
  • Alterations /repairs must be similar to comparable properties
  • The borrower must use a VA-approved builder or contractor

Planning to Do It Yourself?

If you have a knack and a love for home improvement, the reality is that you can save big bucks putting those talents to work. But be smart and recognize which of the DIY are best kept to licensed and seasoned professionals – in the areas of plumbing, electricity, or HVAC, to name a few.

In addition, when buying materials for the project, DIYers should avoid skimping to save a nickel here and there.  It always pays to choose products and materials that will be simple to maintain and have the capability of lasting a long time – bought from a reliable business.

* 2016 American Community Survey, National Assn. of Home Builders

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