Homeowners who want to renovate their home have plenty of attractive options available today. Of course, the better your credit, the more attractive your options! But even if you have a ding or two on your credit report, there are options available. Many mortgage brokers can offer you hundreds of different construction and home improvement loan programs. Everything just depends upon your income and credit score. To get the perfect home renovation loan, please remember these important tips:
Tip #1 – Know How Much You Need and Want to Borrow
When you decide to do a home renovation project either yourself or with a contractor, you have to know up front what it is going to cost. All lenders will want a specific breakdown on what the project is going to cost. If you are bringing in a contractor, you need to have a good, firm bid that is broken down according to materials and labor. Then you should add on 10% for the inevitable cost overruns. You should be including fees for permits and renting of equipment. Then you should add at least a 20% cushion for safety's sake.
No matter what you have seen in lending advertisements, how much you can borrow depends upon your FICO score, loan to value ratio and how much money you make. Remember that for any renovation loan based upon a mortgage, an appraisal will be necessary. Add that to your up-front costs; most appraisals cost $300 to $500.
Tip #2 – The Best Rates Go to the Best Credit Scores
You will want to get a home renovation loan with the best credit score you can muster. Shoot for no late payments at least in the least year, and have your credit cards paid down as much as possible. An overdrawn credit card or a late payment will not kill the deal, but you will end up with a more expensive loan.
Tip #3 Understand Your Loan to Value Ratio
To figure out how much the lender will loan to you, lenders will use the loan to value ratio or LTV. This is a percentage of the appraised value of your home. A normal limit is 80%. This would be $100,000 for a home worth $125,000. Lenders will subtract the balance of your mortgage from that amount to tell you the maximum amount you may borrow. If we assume your balance is $60,000, the largest amount of money you may borrow is $40,000. If you have a high FICO score, the lender could base the loan on a higher percentage than 80% of your LTV. If not, it might only be 65% or 70%. Ask your lending agent what the LTV requirements are for home equity loans.
Tip #4 Consider the FHA 203(k) Mortgage
This is a great loan product from the Federal Housing Authority (FHA). These loans are guaranteed by FHA and allow you to buy your home and renovate it at the same time. The cost of the renovation loan is wrapped into your first mortgage. The amount of the loan is based upon how much the home will be worth after you complete the job. Your house will be worth more, so the amount you can get will be higher. Generally, you cannot borrow as much money with the 203(k) loan, but the interest rate will be very low and you can pay it back over the life of the mortgage.
Tip #5 – Consider a Home Equity Line of Credit or HELOC
This type of loan is similar to a credit card and taps the existing equity on your home. You will have a ceiling for what you can borrow. The big advantage here is that you only are paying interest on the amount that you are using. You just draw funds as you need them, and this will be very helpful if your project is going to take months. There are no closing costs on HELOCs and you will enjoy a very low interest rate, at least at first. Do keep in mind that the interest rate on these loans is variable. Another positive – and this is true with any mortgage loan – the interest on the loan is deductible at tax time. This is a huge advantage over borrowing the money in a regular bank loan or on a credit card.
Tip #6 – Consider an Fannie Mae HomeStyle Renovation Mortgage
This Fannie Mae loan requires only a 5% down payment, but you will need a FICO score of at least 680. This loan product is a good option if you are a real estate investor; many investors will max out credit cards to pay for renovations, or will pay sky high rates for hard money loans. Fannie Mae allows investors to take out a HomeStyle loan with only a 15% down payment.
Getting a home renovation loan today is easier than right after the subprime crash. With an average credit score, you will find that you have several good loan options at minimum. For the best results, try to get your credit score up before you apply for your renovation loan. If you have several months' worth of cash reserves, that also can encourage the lender to give you the loan.
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