What are my mortgage options if I want to do a significant home renovation but I do not have a lot of equity in my home?
The best option to finance home renovations if you have limited equity in your home is a fixer upper mortgage program. These programs enable you to refinance your existing mortgage and pay for significant home renovations with a single new loan.
Unlike standard programs, fixer upper mortgage programs use the after renovation property value to determine the maximum loan amount permitted. Using the after renovation property value enables you to qualify for a higher loan amount.
Additionally, these programs permit a higher loan-to-value (LTV) ratio which makes them ideal for homeowners with little equity in their property. Using a higher LTV ratio also increases the mortgage amount you are eligible for.
The example below demonstrates the benefits of using a fixer upper mortgage program as compared to a standard loan program. As you can see, the fixer upper program enables you to qualify for a much higher mortgage amount, which increases your property renovation budget.
Assumptions
Pre Renovation Property Value: $200,000
Value of Renovations: $75,000
After Renovation Property Value: $275,000
Standard Mortgage Program
Property Value Used to Determine Mortgage Amount: $200,000 (pre renovation value)
LTV Ratio: 80%
Maximum Mortgage Amount: $160,000
Fixer Upper Mortgage Program
Property Value Used to Determine Mortgage Amount: $275,000 (after renovation value)
LTV Ratio: 97%
Maximum Mortgage Amount: $266,750
As demonstrated by the example above, because the fixer upper mortgage program uses the after renovation property value and a higher LTV ratio, you are eligible for a higher loan amount. In this specific case, the maximum mortgage amount with the fixer upper program is over $100,000 higher than for a standard mortgage.
Fixer Upper Mortgage Program Options
The main fixer upper mortgage programs that permit a high LTV ratio include the HomeStyle Renovation, CHOICERenovation and FHA 203(k)programs. We highlight these programs below and you can click on the program title to learn more, including qualification guidelines.
HomeStyle Renovation Program: permits an LTV ratio of 97% for a single unit, owner occupied property financed with a fixed rate mortgage. You are required to pay monthly private mortgage insurance (PMI) if your LTV ratio is greater than 80%.
CHOICERenovation Mortgage Program: allows a maximum LTV ratio of 97% for a single family residence and can also be used for multifamily properties with up to four units, although a lower LTV ratio applies. You are also required to pay PMI if your LTV ratio exceeds 80%.
The HomeStyle Renovation and CHOICERenovation programs are provided by lenders including banks, mortgage brokers and credit unions. We recommend that you shop lenders to find the program that is right for you.
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FHA 203(k) Program: allows a maximum LTV ratio of 97.75% for a refinance. The program requires your to pay an upfront and monthly FHA mortgage insurance premium (MIP) which is an extra closing cost and ongoing expense.
The FHA 203(k) program is provided by approved lenders. We recommend that you contact multiple lenders to determine program availability and loan terms.
Which Fixer Upper Program is Right for You?
The HomeStyle Renovation and CHOICERenovation programs tend to charge higher mortgage rates but there is no upfront mortgage insurance fee and the monthly PMI fee is cancellable when your loan-to-value (LTV) ratio reaches a certain level. On the other hand, the FHA 203(k) program applies a slightly higher maximum LTV ratio and more flexible qualification guidelines than the other two programs.
Borrowers with higher credit scores tend to choose conventional options such as the HomeStyle Renovation or CHOICERenovation program but we recommend that you compare mortgage terms to determine the program that best meets your needs.
We should highlight that if you want to use any of the programs above, you are required to refinance your current mortgage. If you have a high interest rate then refinancing may make sense but if you have attractive current loan terms this is an important consideration because the mortgage rate for a fixer upper program tends to be higher than for other programs.
Review Best Fixer Upper Mortgage Programs
It is also important to understand that you need to qualify for the mortgage based on your credit score, debt-to-income ratio, employment status and other factors. Even if you have enough equity in your home to meet the LTV ratio requirement you still need to demonstrate that you can afford the monthly payment and repay the loan over time.
Finally, 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 reports. Plus, you need to obtain the necessary building permits.
Given additional amount of work required to process this type of mortgage, not all lenders offer fixer upper programs. You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by loan program. For example, you can find top-rated lenders in your state that offer the HomeStyle Renovation and FHA 203(k) programs.
Sources
"HomeStyle Renovation." Mortgage Products. Fannie Mae, 2020. Web.
"CHOICERenovation Mortgages." Single Family. Freddie Mac, June 2019. Web.
"203(K) Rehab Mortgage Insurance." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
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