The Renovation Mortgage Process Revealed

Frequently Asked Questions

How do these Renovation loans work?

These loans work mostly just like the Traditional counter part Programs would work essentially. To keep it simple the primary three aspects that are different are

  • 1) You get to include a Renovation Budget in the Loan Amount
  • 2) You get to use an After Improved Value Appraisal
  • 3) Contractor requirements
What types of Renovations can be included?

a) This will typically depend on what program is being used. The Limited FHA 203k and VA Renovation Loan Program allows what is considered Cosmetic/Non-Structural Repairs. The Standard FHA 203k and HomeStyle Program typically only limit outbuildings.

What are the most common loan process delays, or how do I best avoid unnecessary delays with these loan programs?

The #1 delay with going thru the loan process with these Renovation loan programs is typically tied to the Contractor selection phase, bid development phase by your selected Contractor, and thus timely ordering of the After Value Appraisal. The 2nd most common delay is typically obtaining completed paperwork from your selected Contractor to complete the required Contractor Validation Review & Sign off for the loan file. The sooner you manage these phases prior to or once under Contract on a property for a Purchase Transaction the quicker your loan will typically move thru processing in a more timely manner. The Contractor piece is very key as most of the rest of the process is just like going thru a Traditional transaction.

What are the interest rates like?

a) You should expect best case 0.25% to 0.50% or higher ranges as compared to a traditionally priced Mortgage Program

  • Example: If you qualify for a Traditional FHA at 4.0% you may expect a typically FHA 203k to be priced around 4.5% (give or take a bit)
Why are the interest rates higher?

a) Risk is the short answer. The lender is allowing you to close on a Property in an “As Is” condition mostly based on After Improved Value and the assumption that all planed Renovations will be completed (without requiring they first be completed).

  • The Exception is 203k Refinances which now do require As Is Appraisals also but do not require Renovations be completed first.
How long do I have to complete the Renovations?

a) This depends on the Program being utilized. On average you can expect 4-6 months and up to 9 months on larger projects

Do the Renovations have to be completed before or after closing?

a) After closing. This is the beauty of these programs. When you hear someone say “That home wont go VA or FHA,” you can now say it can go FHA 203k or it can go VA Renovation and you will be telling the truth and possibly not missing out on a good opportunity.

Why is the bid required from the Contractor before the appraisal? Doesn’t the appraiser have to tell you what repairs are needed?

a) First off, no the appraiser does not tell you what has to be repaired. Your job along with the use of a Selected Contractor or initially a Home Inspector or 203k Consultant/Inspector is to determine a comfortable target budget range for Renovations and then to develop a list of items that an inspector would deem required as these are the same items an appraiser will most likely flag. Then you can also include any items that are on your “want” list. The Contractors bid or 203k Consultants Work Write Up is then used by the lender to order the After Improved Value Appraisal with. They are sent to the appraiser to help them see what work is being done and look for similar comparable to help determine the best Post Renovation Value Estimate for your Property.

What are Contractor Requirements including licensing?

a)A General Contractor will make things easier for all programs but isn’t required for the Limited FHA 203k Program. (This program is the only one that allows up to 3-4 Contractors depending on the lender – each one would have to also be validated by the lender)
a)Contractors must only be licensed if required by the State or local County or Municipality.
i.Other requirements: Complete the lenders Contractor Validation Package (includes forms such as a W-9 and providing proof of Liability Insurance); Provide a detailed Bid; Understand how the loan program being used will pay them after closing; Help move the loan process along in a timely manner as requests for information are received such as, bid updates/tweaks or other clarifying information sometimes requested.

How does the Contractor get paid?

a) The Limited FHA 203k is generally the only program that will pay the Contractor an initial deposit at or after loan closing of up to 50% of the Renovation budget.
b) The VA Renovation Loan Program payout may vary between a deposit being allowed or draw payments.
c) The Standard FHA 203k and HomeStyle Programs will pay on a draw schedule basis requiring work be completed, inspected, and then a check cut. Up to 5 Draws are typically all that is allowed with these programs.

  • Draw inspection costs are financed in the loans
When does the first monthly mortgage payment begin?

a) These programs do not work like Interest Only Construction Loans where you only payan interest payment during the construction phase. You will pay a fully amortized Monthly Total Payment including Principal, Interest, Taxes, and Insurance that will start similar to how a Standard Non Renovation Mortgage Program would. For example you can generally expect your first payment to be due anywhere from 30-45 days or so from your loan Closing & Funding

Can any payments be included in the Loan?

a) Yes the FHA Standard 203k and the Fannie Mae HomeStyle Programs do allow up to 6 months of the first payments to be financed in the loan amount (given sufficient value to include them).

  • Lenders may require verification from the 203k Consultant/Inspector or your Contractor of how long it will take the home to be made livable. Example: If they state it will take 3 months they may only allow 3 months to be financed
When can I move in?

a) With the exception of the Limited FHA 203k where the home is now generally required to be livable within 30 days there is not limit on when you can move in.

  • You can move in right away and live thru the Renovations if you like
  • You can wait until Renovations are completed to move in
  • You can wait until the home is livable enough to move in
  • Mostly its your choice
What is a Contingency?

a) A Contingency is a 10% to 20% Emergency Reserve budget that the lender will automatically finance in the loan in addition to your Base Renovation Budget.

  • This prevents your Contractor from needing to add this extra in there Bid
  • This allows some coverage to protect you from unforeseen additions that are known to popup during Renovations.
What happens if my Contractor doesn’t use the Contingency?

a) Any amount left over will apply as Principal Reduction on the loan balance at the close out of the Renovation phase.
b) The Standard FHA 203k and the Fannie Mae HomeStyle Programs do allow you to request to use any amount left over to do additional renovations with per request and approval from the lender.

What type of Inspector is required?

a) The Standard FHA 203k will require a 203k Consultant also known as a HUD Consultant
b) The Fannie Mae HomeStyle will require a Feasibility Inspection be completed during the appraisal phase

Is there a Maximum Renovation Amount the loan allows?

a) Limited FHA 203k – Maximum Total Renovation Costs including Contingency, Inspections, and Fees, etc. is $35k

  • This typically results in the Max Base Renovation Bid Amount being able to be around $30k to $31k Max roughly
  • You will be allowed to finance up to 110% LTV

b) Standard FHA 203k – No Maximum Renovation Budget

  • With this program you will only be limited by the Max FHA Loan Limit for the area the property is in.
  • You will be allowed to Finance up to 110% LTV

c) Fannie Mae HomeStyle – The Max Renovation Budget cannot exceed 50% of the After Improved Appraisal Value

  • Example: If the After Value is $200k then the Total Renovation Costs including Contingency, Inspections, and Fees etc. cannot exceed $100k.

d) VA Renovation – Maximum Total Renovation Costs including Contingency, Inspections, and Fees, etc. is $35k or 25% of the After Improved Appraisal Value

  • Example: If the After Value is $200k then the Total Renovation Costs including Contingency, Inspections, and Fees etc. cannot exceed $50k for that program.

e) Jumbo Renovation – $250k or at lender discretion depending on options available.

Is there a Minimum Renovation Amount the loan allows?

a) Depending on the Program being used this will range from $0 Minimum to a max of $5,000 minimum repairs

How long does it take to close a Renovation loan from start to finish?

An experienced Renovation Mortgage Originator would typically recommend a 60 day timeline to fully navigate a Renovation Transaction be it a Purchase or Refinance. They key once again lies with how long it take to secure your Contractor selection and finalize a Bid. Example: Should you have a Contractor selected and bid ready to go week 1 you would be giving your lender a solid chance to close your transaction much quicker. Be careful of lenders that say they can close a Renovation loan in 30 days as typically they mean 30 days from receipt for the approved Bid in which they can order the appraisal. Ultimately the answer is that the timeline will depend on the Contractor, Inspections, Bid Finalization and Overall Property Condition.

Why is it hard to get approved by a lender for "Self-Help" to be my own Contractor?

The main reasons are the ability for the lender to accurately attest to your ability to complete all renovations in a professional “workman like manner.” Most lenders thus require that you be a Contractor by Profession or Trade in order to even have a shot at their approval for what is referred to as “Self-Help.” The other reason is the required timeline for the completion of all Renovation based on the Program being used and its requirements. Most of these programs have a 3-6 month and up to a potential 9 month max completion requirement. Concerns about hitting these timelines post close are what makes it more difficult to get approved for Self-Help on these transactions. Projects not completed on time can put the lender at risk, in which case results in the lender having to close out incomplete projects and applying unused funds to principal reduction. This leaves the lender with a loan based on a complete Renovation and After Value that was never fully completed.

Why does it take longer to close a Renovation loan compared to a non renovation loan ?

Many reasons can account for this but the primary reasons would be the Property and what needs to be addressed specifically to bring it up to minimum property standards or to put together the desired updates etc. The Contractor selection phase and Bid development steps are often the main reasons for delays with these transactions. The unpredictable nature of Real Estate is another reason also, as sometimes there is just no way to anticipate “one offs” that pop up on any given transaction from time to time. On a standard transaction the appraisal order and turn times are typically much quicker and the properties are typically in much better condition which often allows those transactions to move along much quicker. With a Renovation loan you may need a specific 203k/HUD inspector or Feasibility Inspector for a HomeStyle Program and you have to wait for the Contractor and Bid steps to be completed in order to place the After Value appraisal order

How should I go about finding a Contractor?

There are many online resources that you can explore such as Angie’s List, Home Advisers, or NARI Lenders may have some resources they can recommend as well, but don’t be surprised if they shy away from making any specific Contractor recommendations to prevent a conflict of interest or future liability should there be a dispute that later arises. If your State or County requires the licensing of General Contractors these sites or offices often have search options or list of active licensed Contractors as well. Realtors/Real Estate Professionals or Family are sometimes good additional resources while searching as well. This is an important step in the process but remember not to take too long – especially on a Purchase transaction with hard deadlines in place. Note: Lenders do not typically keep approved Contractor lists on file that you are required to use. The Contractor selection is your choice so be cautious of any lenders that insinuate that you have to use a specific lender they are recommending.

What should I look for in a Contractor?

You should look for Licenses if required by the State or Local Municipalities. You should ask for References and Proof of Liability Insurance. You should ask for a portfolio of completed projects of some type. They should be able to be flexible in how they are paid. If the program you need doesn’t payout an initial deposit and only pays via Draws you will need a Contractor that can work with this comfortably and carry a project a bit between each draw payment. There is ultimately no 100% fool proof verification process but at minimum these would be good areas to begin with in terms of doing your due diligence. In addition to your own due diligence these programs also have the built in Contractor Validation requirement that also will require this certain information be submitted by your selected Contractor for review by the lender as well. The NARI website may also be a good resource in terms of industry recommendations when selecting a Contractor.

What should I consider most when selecting a lender to work with on a FHA 203k or Renovation loan?

You should consider the lenders ability to answer many of the Frequently Asked Questions listed in this section. Pick out 3 to 5 of these questions for starters and quiz the lender you speak with in terms of their knowledge specific to how these programs work and the overall loan process flows. An experienced originator should be able to answer these questions easily. An inexperienced lender may fumble or ask to get back to you on specifics or often times they will try to talk you out of using one of these loan programs altogether.

What type of Credit score do I need to qualify for an FHA 203k or other Renovation loan Program?

This answer will ultimately depend on the specific lender(s) you speak with. On the low end range of credit scores you should expect the 620-640 range to be standard. Some lenders may be willing to go under 620 depending on specific risk offsets that you may be able to document but expect this to be difficult to find.. For the HomeStyle and/or Jumbo Programs you may run into much higher credit score requirements such as 660-680 and up depending on specific lenders..The best approach is to call lenders and ask what their specific guidelines allow.

How is the minimum required down payment calculated with a Renovation loan purchase transaction?

To keep it simple this is done by taking the Contract Purchase Price plus Total Renovation Costs (includes Base Renovation Bid Amount, plus Contingency, plus inspections and fees). Then you multiply that total times 3.5% or 5% or 10% or whatever the Program being used requires as minimum down payment. Refinances are a similar calculation but you replace the Purchase Price with the Payoff balance on the existing mortgage unless the property is F&C. Lenders have a worksheet that they use called a Maximum Mortgage Worksheet MMW that helps them calculate an accurate loan amount.

How much do I have to put down in a Renovation loan Purchase transaction?
  • VA Renovation will require 0% Down or 100% LTV Financing
  • FHA 203k will require 3.5% Down or 96.5% LTV
  • HomeStyle minimum required is 5% Down or 95% LTV
  • Jumbo Renovation may vary on the product being used from 10-20% Down depending on the lender.
What should I look for in a Realtor if I'm interested in a Renovation loan or properties that need some updating?

You should look for someone who understands your goals and needs and that is open to supporting you with the loan options you are considering. Just like an inexperienced lender some Realtors may also try to talk you out of considering these programs as viable options due to their own lack of understanding of the benefits available to you as a client. Make sure they are loosely familiar with the options you want to consider and property types you are open to looking at. Make sure they are professional and see if they have any lender contacts that are knowledgeable enough to do a Renovation loan. Ultimately, just make sure you don’t end up with both a lender and Realtor that aren’t familiar with these Programs as that will be a recipe for disaster from “go.”

The Property I am interested in Purchasing is listed as "As Is", Cash Only, or Cash or Conventional Only. Can I still use a Renovation Loan to buy this property?

The short answer is yes you 100% can buy one of these properties with an FHA 203k or VA Renovation or HomeStyle loan program. That just leaves the need for the listing agent to be willing to work with your financing. Don’t let them tell you the home won’t pass FHA or VA, etc because remember you are using a Renovation loan Program and it will thus be able to pass minimum property standards. Often times some agents are only looking for Cash buyers so if they give you a difficult time with your offer it may be best to just move on to something else rather then fighting it out with someone who is not fully educated on these products nor willing to gain the understanding and work with you on putting a deal together.

How do I decide which Renovation Program is the best option for me?

Consider the General Program Guidelines and how you fit in terms of Minimum Credit Scores and Down Payment funds available (Note: Down Payment Assistance is normally a non existent option with a Renovation Loan). Next consider the Property and the type of work needed as well as the rough budget it will take to complete that work and see what Program fits (Example: FHA Limited 203k vs FHA Standard 203k). Are you or your spouse a Veteran because if so the VA Renovation product will be the best fit, and you will want to only search lenders that offer that program for example.

What Happens After My Renovation Loan Closes

a) The Lender/Servicers/Investors Draw Dept. will await receipt of your file so they can get it setup to manage the Renovation phase. If your lender is selling your loan to an Investor expect delays during this phase as the servicer/investor won’t be able to setup the file or assist with scheduling inspections until the loan has been fully purchased. This could take 30-45 days so be prepared and ask upfront so you have a better idea of how to plan your post close project with your Contractor. This is especially important on a Standard 203k or HomeStyle Program which do not release an initial renovation deposit upon closing/funding. Your Contractor will need this information in order to plan accordingly with scheduling work and expecting funds for payment, so they or any subs can be paid with as little delay as possible. (consult your lender)

When can my Contractor Start work?

a) These programs typically require that work begin within the first 30 days after closing. (consult your lender)

When does the Seller & Realtor get paid?

a) The Seller & Realtor will be paid upon closing and funding of a Purchase loan.

How do the Draw Payments Work?

a) If you are working with one of the Programs that require Draw Payments to the Contractor such as the FHA Standard 203k or HomeStyle Program and/or include a FHA 203k/HUD Consultant or Third Party Inspector you can expect that at most they will be looking to complete a progress inspection around every 30 days. Should things get started quickly and your Contractor be ready for Draw Inspections sooner then 30 days that should not be a problem either. Overall just make sure you are coordinating and communicating with your Contractor, Inspector, and Lender Draw Dept. Contact so that everyone is on the same page with expectations upon closing of the loan.

How do I resolve Contractor disputes after closing?

a) Should Contractor disputes arise after closing you should first contact either your 203k/HUD Consultant if applicable or contact the Lender Draw Dept. Contact for their guidance on next steps.

Can I Terminate my Contractor after loan closing or what if my Contractor “walks of the job” after loan closing?

a) Refer to one of the Renovation Loan Disclosure Forms that you and your Contractor would have been required to complete called the HOCA or Homeowner Contractor Agreement Form. Within this Agreement which is required by the Renovation Loan Programs and which is between you and your selected Contractor you will find a section that discusses Termination. Once again you will also want to coordinate and communicate any next steps with both your 203k/HUD Consultant and Lender Draw Dept. Contact.