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Mortgage based on after renovation property value

I am looking to make significant improvements to my existing home. Are there lenders that provide an 80% loan-to-value (LTV) ratio mortgage based on the post-renovation property value?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Most standard mortgage programs do not use the after renovation property value to determine the loan-to-value (LTV) ratio which is the ratio of your mortgage amount to the value of the property being financed. In this case, this means that lenders use a lower property value -- assuming the pre-renovation property value is less than the post-renovation value -- to determine your LTV ratio and the maximum mortgage amount you qualify for.

The example below demonstrates the difference in mortgage amount you qualify for if the LTV ratio is based on the pre-renovation property value as compared to the after renovation property value. This example assumes the property owner makes $100,000 in property renovations and the lender uses an 80% LTV ratio.

Mortgage Amount Based on Before Renovation Property Value

Pre-Renovation Property Value: $400,000

Maximum Mortgage Amount: $320,000 ($400,000 * 80% LTV = $320,000)

Mortgage Amount Based on After Renovation Property Value

Post Renovation Property Value: $500,000

Maximum Mortgage Amount: $400,000 ($500,000 * 80% LTV = $400,000)

As the example above demonstrates, there is a significant difference in mortgage amount if you use the post-renovation property value to calculate the LTV ratio as opposed to the pre-renovation property value. In many cases, borrowers need the larger mortgage to complete their planned property renovations.

Standard mortgage programs use the pre-renovation property value because there is more risk if lenders use the after renovation value. The renovations may not be completed and there is no guarantee that they produce the expected increase in property value. The lower the property value used by the lender and lower the mortgage amount, the more security and less risk lenders take on when they provide a mortgage.

Although standard loan programs use the pre-renovation property value, fixer upper mortgage programs determine your LTV ratio and the mortgage amount you qualify for based on the after renovation property value. These programs enable you to obtain a higher mortgage amount to pay for property upgrades and improvements.

Review Best Fixer Upper Mortgage Programs

Because of their unique qualification guidelines, home renovation mortgage programs enable you to purchase a property that needs renovations or refinance the mortgage on your existing home and include funds for renovating the property in the mortgage amount.

In some cases if you want to finance a major home renovation project, you are required to obtain a separate construction or home equity loan which can be expensive, complicated and time-consuming. Home renovation mortgage programs can be used for significant home improvement projects or total tear-downs, making them applicable for borrowers looking to buy or refinance fixer-uppers. We provide a summary of some of the most common home renovation mortgage programs below:

HomeStyle Renovation Program. The Fannie Mae HomeStyle Renovation Mortgage program enables borrowers to purchase a home that needs renovations or refinance the mortgage on their existing home and include funds for renovating the property in the loan amount. The program only requires a down payment of 3% for single unit, owner occupied properties financed with a fixed rate mortgage. The HomeStyle Renovation Mortgage program does not charge an upfront mortgage insurance fee although you may be required to pay PMI if your LTV ratio is greater than 80%.

Review our HomeStyle Renovation Mortgage Guide

FHA 203(k) Program. The FHA 203(k) Loan Program enables home owners to finance both the purchase of a home as well as the cost of significant rehabilitation, remodeling and repairs to the home with a single FHA mortgage. The FHA 203(k) program requires a down payment of 3.5% for a purchase mortgage and 2.25% in homeowners equity for a refinance. The program requires borrowers to pay an upfront and ongoing FHA mortgage insurance premium (MIP) which is an extra closing cost and monthly fee.

Review our FHA 203(k) Mortgage Guide

Construction to Permanent (C2P). A construction to permanent mortgage, or C2P loan, enables you to finance the cost of building a new home or significant renovations, including for a fixer upper, with a single mortgage. A C2P loan usually requires a larger down payment than the FHA 203(k) and HomeStyle Renovation Mortgage Programs outlined above. C2P loans may enable you to qualify for a higher mortgage amount than the FHA 203(k) or HomeStyle Renovation programs, which both apply loan limits.

Review our Construction to Permanent Loan Guide

Please note that fixer upper mortgage programs require more time and effort from both you and your lender. You are required to submit your renovation plans to the lender including engineering and architectural reports. Your mortgage proceeds are placed in an escrow account at closing and disbursed as your property renovations are completed.

Home renovation mortgage programs are offered by traditional lenders such as banks, mortgage brokers and credit unions. Given the additional amount of work required to process these types of loans, program availability varies.

The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to determine if they offer fixer upper programs. Plus, shopping lenders is the best way to save money on your mortgage.

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Current Mortgage Rates as of May 23, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

If you already own your home, you could consider a home equity loan or home improvement loan to finance property renovations. While home equity loan qualification is typically based on the pre-renovation property value, home improvement loans use the post-renovation value which enables you to qualify for a higher loan amount.

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Current Home Equity Loan Rates as of May 23, 2019
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%

Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click for more information on rates and product details.

Home equity and home improvement loans typically have lower closing costs than a mortgage but you need to make sure you can borrow enough to finance your property renovations as the maximum loan amount is smaller.

Use the FREEandCLEAR Lender Directory to find lenders that offer HomeStyle Renovation, FHA 203(k) and Construction-to-Permanent mortgages.

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Sources

HomeStyle Renovation Mortgage:  https://www.fanniemae.com/content/fact_sheet/homestyle-renovation-overview.pdf

FHA 203(k) Mortgage: https://www.hud.gov/program_offices/housing/sfh/203k/203k--df

C2P Loan: http://www.freddiemac.com/learn/pdfs/uw/construction.pdf

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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