Most of the previous financing options are usually capped by a static appraisal of your client's home. In short, these options do not account for potential increased equity created by the new renovations. Following are a few options that allow for the project itself to capitalize on that potential equity.
There will be more scrutiny of you, as the contractor, when financing options like these are used. The lender will seek to make sure you are qualified for the job and will check necessary licensure, insurances, including errors and omission insurance, and any state-required bonding. They will also check your qualifications through your past clients. In any of these three options, drawing on available funds will be at the discretion of the lender and will occur at pre-established intervals. It’s important for you as the contractor to budget and plan accordingly.
Conventional Renovation Loans – Fannie Mae and Freddie Mac offer some options for the financing of energy-efficient additions, as well as home renovations. Although these loans have controls in place for maximum borrowing, they will be based on the “after improved” value of the home. The value of the desired improvements will be incorporated into the appraiser’s final opinion of value. The total loan amount to your client will be limited to a total of 95% of the homes after-improved value for a single-family residence. The total renovation costs are limited to 50% of the homes after-completed value. Loans of this type are beneficial because they have only one closing and one set of closing costs.
Federal Housing Administration 203k Loan – Per David Matejka, vice president of 1st Mortgages, “like a conventional renovation loan, this loan will allow for the consideration of the equity you are creating with repair, remodel, or renovation. The total loan amount would be limited to 110% of the home’s value after improvements are made. All aspects of the renovation are required to be completed within six months of closing to ensure that you don’t exceed this period for your project.”
Construction Loans – From Rory Hamilton, mortgage loan officer at First National Bank, “loans of this type can be advantageous, depending on the scope of the project. For larger projects, this could definitely be the best option, including projects that are scrape and build or start with a vacant lot. These scenarios would differ in that the borrower would borrow and close two separate loans. One loan for funding the construction or renovation project, the other loan to pay off that construction loan.”
It is also important that you know the draw limitations of many of these financing options as some have limited cash draws over the course of the project. This can be a challenge to you from a cash-flow standpoint. As with any project, “look before you leap” so you know what you are getting into.
In closing, we hope that all these options help you understand the various financing options to give your client access to the cash necessary to complete a needed remodel. For any loan option, it is vital that your clients work with a knowledgeable financial expert who can help them explore the pros and cons of many of the options and recommend the best alternative. With the basic knowledge of these options, it will help you help your clients and develop more business for you, the professional.
This is the last article in a part four-part series where the co-founders of the Living in Place Institute detail different financing options contractors should be aware of when working with a living in place client. Read more coverage on Financing Options for the Future: Non-Borrowing, Non-Mortgage Borrowing, and Mortgage Options.
