On the first day of searching for our first home, we visited three houses for sale. We called them the “bad kitchen,” “the bad bedroom” and the “too far.” The “too far” was outside our walking range—we didn’t want to have to dread walking to shul! The “bad bedroom” had been renovated to add an office suite to the master bedroom. This is not such a bad idea on its face, but they achieved the change by reducing the top floor from three bedrooms to just two—not ideal for our young family. The “bad kitchen” had a kitchen that simply did not suit our needs—there weren’t enough cabinets, there wasn’t room to sit and eat, and the sink was much too shallow. After many more days of looking at available houses, we came to realize that even with the “bad kitchen,” that house was our best option overall.
We decided to buy the house and redo the kitchen. It was my first experience with a “Yes, but” kind of home. A “Yes, but” home is a house that generally meets a family’s needs, except for a key element that doesn’t quite match—like a bad kitchen, not enough bathrooms, a dining room that’s too small, or dated decor. In the world of mortgages there are options to help with just this kind of scenario.
One solution is the renovation loan. The renovation loan is sometimes referred to as a 203k loan, which is the naming classification for this loan type with the FHA (Federal Housing Administration). The conventional renovation loan is known as the HomeStyle. Both the 203k and HomeStyle allow the borrower to take out one loan that covers both the mortgage AND the cost of the renovation. The renovation loan can be used for a range of home modifications from modest to extensive. Among the changes that can be made with a renovation loan include new paint and flooring, upgraded appliances, improved safety features, additions, adaptations for disabilities, roofing, landscaping and updates to conserve energy (which could be combined with the HomeStyle Energy mortgage for additional benefits).
Another useful way to use a renovation loan is with managing a contractor’s work and payments. The funds for the renovation are put into escrow at the time of closing, and then the contractor requests withdrawals from the funds as work is completed. For the contractor to receive funds, the borrower must agree that work has been completed to satisfaction.
Consider this example: A family finds a home in an attractive area. It meets almost all of their needs and desires, but would require a significant renovation of the bathrooms. After meeting with an approved estimator, the family believes that the renovations will cost $20,000. If the family needs a loan for the purchase of $600,000 and we add the $20,000 home improvement cost, the new total mortgage for the home is $620,000.
For current homeowners, a renovation loan can also be used to refinance where the base loan amount is the amount needed to pay off the existing mortgage and the renovation costs are added to make the new loan amount. One additional option available to homeowners is a cash-out refinance, which can help get funds for updates, additions, and more. In a cash-out refinance, the borrowers take out a new loan that is higher than their current mortgage balance and the extra is given as cash back to the client to use as needed. In this scenario, the cash received does not have to be used for renovations; it could be used to pay off credit card debt, as a down-payment on an investment property, or really anything the borrower chooses to do with the money. For many homeowners the cash-out refinance gives them the opportunity to take advantage of equity in their home, use the funds to make improvements so their home better suits their needs, and to potentially add to the home’s value for a future resale.
With these creative and useful mortgage products there are options available for both homebuyers and homeowners to get the financing they need for their desired home renovations. So, don’t let a “bad kitchen” or “bad bedroom” make you automatically rule out a potential home. And while renovation loans and cash-out refinance products still can’t help with a home that’s “too far,” it might be just what you need.
Tami Arnowitz is a loan officer at Quintessential Mortgage Group ( www.qmgllc.com ). Her goal is to help clients understand the home financing process and find the right mortgage product for their needs. She also serves as a resource to real estate partners. Tami lives in Westchester with her husband, Rabbi Jeffrey Arnowitz, and their four sons. Tami can be reached at [email protected].
