Dear Monty column: Is a renovation mortgage right for you?
Reader Question: We are looking to buy our first home. We have seen a house we like, but it needs much work. The house has been neglected but has a solid structure. We have a down payment and good credit. Twenty-percent down at our price point, but not enough cash to make the down payment and do all the repairs at the same time. A friend suggested we get a low-interest rate credit card with a high limit and use it as a line of credit. What do you think?
Monty's Answer: Shopping for the loan that best suits your situation and your housing goals takes effort. One task is assembling the documents required by a lender. Then the big job is researching all the alternative sources of funding and interviewing the loan officers, also known as originators. From your description of the house and your finances, you will have several choices. It depends on your income, any debt you or your co-borrower have, any military service, your chances of continued employment and promotion, and more. Here is helpful information and questions to ask at how to find a home mortgage.
The lender pool
While there are other options (a credit card may be one), the most logical choice may be a renovation mortgage loan. You borrow enough to buy the house "as is" and, at the same time, include additional funds to make the improvements. The institutions below that guarantee these loans have different guidelines. You would seek originators that offer these different renovation loans. You may qualify for a mortgage from one or two of this type of loan, but not all three. Put the information that you assembled in a PDF file you can email when you want to send it to an interested lender. Be aware not all lenders offer these products for a variety of reasons. As an example, these loans are more work for the lender.
This type of loan features an "as is" and "as-completed "appraisal. Funds are escrowed for the future work and paid out on completion of the work after closing. Here are three products that function in this manner:
1. Fannie Mae Homestyle loan
2. USDA rural housing loan
3. HUD 203k loan
Another potential option
If you or your co-borrower are veterans, you can borrow the entire purchase price. The VA mortgage also carries attractive long term fixed-rate loans at attractive rates. Compare the costs of the three products above with a VA loan. You put no money down on the house and use your down payment capital to fund the improvements. It would be best if you run this idea by the originators. It may or may not be the best route for you, but the folks you share your situation with have advice, and they may not all be in concert.
Richard Montgomery is the author of “House Money - An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Find him at DearMonty.com.