A home’s ability to pass an inspection is critical in determining whether a property will be on the market a long time, how much it will sell for, whether a buyer can finance the purchase, or whether it will sell at all. Most homes will eventually pass an inspection – even if it takes a few minor fixes. But other times, it’s not so easy.
Cash and Conventional Only Homes
Some homes fail inspection because lenders require every major home component to be in excellent shape. If the house isn’t in prime condition and the buyer and seller can’t negotiate a way to fix the issues, real estate agents typically list the home as “Cash and conventional only.” That means you will need to help them find a buyer who can pay with cash or use a conventional loan to purchase the property.
Here’s the problem with that – how many people do you know that have enough cash lying around to pay for a house? Probably not many.
If only there were an easier way for you to help your clients sell a home that doesn’t pass inspection – or assist your buyers in purchasing such a home. Wait, there is, but you may not know about it. Until now.
Instead of listing such homes as “Cash and conventional only,” which severely limits the buyers’ pool, you can list the home just like any other home that passed inspection. That way, you aren’t disqualifying potential buyers from the very beginning.
But if the buyer can’t afford the needed repairs, doesn’t have the cash to purchase the home, and the seller refuses to chip in for them, how could this house sell?
Renovation Loans to the Rescue
What most of your clients don’t know about is that they could be eligible for a type of mortgage loan called a home renovation loan. These are available to an FHA, VA, or USDA buyer, if the buyer, property, and needed renovations meet specific requirements.
If you’re not educating your buyers and sellers about the renovation mortgage option, you’re limiting their alternatives. Not to mention shooting yourself in the foot when it comes to making more sales.
Renovation loans offer many advantages for your clients, including making the home easier to sell or purchase without the home passing an inspection. Here are a few.
- Makes it easier to find a buyer
- Increases the chances that the buyer will pay for repairs
- Helps get the home sold faster
- Increases the number of homes to choose from
- Creates an opportunity to build their dream home
- Allows them to plan renovations without credit card debt
- Limits closing costs
- Builds home equity right away
There are several home renovation loans, each with benefits and requirements. We’ll summarize below and encourage you to schedule a Lunch & Learn with our mortgage team to get more in-depth information you can share with your clients.
HomeStyle Renovation Loans
These loans allow borrowers to obtain a purchase transaction mortgage or a limited cash-out refinance mortgage to pay for repairs, remodeling, renovations, or energy-efficient upgrades to the property.
They allow the borrower to make needed repairs and renovations with a single-close first mortgage, so they don’t have to apply for a second mortgage, home equity line of credit, or another financing method.
Repairs don’t need to abide by any required improvements, restrictions, or minimum dollar amount but must be permanently affixed to the real property and add value to it.
Other details include:
- 5% minimum down payment for primary, single-family homes (10% for second homes)
- 3% minimum down payment if using gift funds toward down payment and closing costs toward owner-occupied, primary residences
- 3% seller contribution allowed
- Cosmetic and structural renovations allowed, including landscaping, appliances, swimming pools, etc.
FHA 203k Renovation Loan
An FHA 203k is a home renovation loan insured by the Federal Housing Administration (FHA). It allows a prospective homebuyer to borrow cash for the home purchase and any improvement/renovation projects done after they become the new homeowner.
They can accomplish all this using just one loan. There are steps to take throughout that process, but we can help walk your client through each.
With an FHA 203(k) loan, your client can buy a home at a very reasonable price and remodel it to reflect their tastes and personality. This loan is unique because they can borrow the funds they’ll need based on what their house is expected to be worth after the renovation is complete.
Some other advantages of this type of renovation loan include:
- Low 3.5% down payment option
- Lower credit score requirements
- Seller contributions of up to 6% of the purchase price
- 15- to 30-year term with a fixed interest rate
What types of renovations can be done using an FHA 203k Renovation Loan? That’s a question you’ll get from your clients. Here’s the answer.
- Remodel the kitchen or bathroom
- Replace a roof
- Replace house siding
- Paint house interior and exterior
- Replace appliances
- Put in new flooring
- Build or replace a deck/patio/porch
- Replace windows
- Repair/replace the septic system
VA Renovation Loan
In 2018, the Department of Veterans Affairs updated its VA loan guidelines to include purchasing and renovating a home. But there are a few caveats: a VA-approved contractor is required, eligible projects are limited, and the lender may charge a construction fee.
But these renovation loans are still a better option than trying to find a cash buyer.
VA loans for alteration and repair allow buyers to purchase or refinance a home and roll the cost of improvements into the mortgage. With this option, your client will not be limited to homes that already meet the VA’s minimum property requirements. They can use the repair money to bring the home up to the VA’s standards.
A VA renovation loan might also be worth considering for your clients who already own a home that needs some attention. Usually, with a VA cash-out refinance, the loan amount can’t exceed the home’s current value. But with a VA renovation cash-out refinance, the home’s expected value determines the maximum loan amount after repairs are complete.
Contact our office to schedule a Lunch & Learn to learn more about renovation loan options that will help your clients finance their dream homes – or soon-to-be dream homes.