Mortgages offer combined home price, renovation cost

Mortgage products that combine the home price and renovation costs in a single loan are not new, but the reduction of red tape related to these loans is making them a more attractive option for home buyers, according to Richard Hoover, of Source One Mortgage Corporation.

Hoover, a renovation specialist with Renovation Plus, a division of Source One, focuses exclusively on combination mortgage/renovation loans for existing homes, such as the FHA 203(k) and the FannieMae HomeStyle mortgage.

The 203(k) is an FHA loan that combines the purchase price and renovation costs to improve a home's function, bring it up to FHA standards and improve the owner's equity position. The FannieMae HomeStyle mortgage is for higher-priced properties combining the purchase and renovation costs, but with no restrictions on home improvements, up to and including adding a swimming pool.

Both loan programs are available for home purchases or to refinance.

These loans, particularly the 203(k) "have been available for years," Hoover said, "but they used to be so paper-laden that a lot of (lenders) haven't done them."

Many lenders have been deterred from offering these programs because of the risk involved, Hoover said. After all, someone is going in and ripping apart the house, which is the security on the loan.

Renovation Plus is able to specialize in these loans by having its own draw administration, Hoover said, supervising the process from loan approval to the driving of the last nail. The company sees where all the money goes and sees to it that everyone gets paid as they should.

Also, with 203(k) loans, which are authorized by the Department of Housing and Urban Development, a HUD inspector acts as a third-party consultant, assuring that work is up to standard and that HUD's interests are protected, he said.

The 203(k) provides assistance with repairs and renovations including:

Central air and heating

Kitchen cabinets and countertops

Built-in appliances, range and dishwasher

Remodeled bathrooms

Windows

Roofs

Room additions for bedroom, bathroom, family room, screened-in porch, garage/carport and wall-to-wall carpeting.

Borrowers under the 203(k) can borrow 97 percent of the purchase price or the existing debt, and 100 percent of the renovation/improvement costs or 110 percent of the post-improvement value. A minimum of $5,000 in renovations is required.

Interest on the loan is fully deductible, and the loan can include up to six months of mortgage payments if the owner is unable to live in the home while renovating.

Properties to be renovated under 203(k) loans generally must be owner-occupied, but the structure can be multifamily up to a fourplex. The property must have been complete for at least one year to qualify. The 203(k) loan is also available to nonprofits or municipalities that wish to rehabilitate and sell properties, Hoover said.

The FannieMae HomeStyle mortgage, which has been available for the last few years, is targeted to larger priced homes, such as older Victorians, Hoover said.

The HomeStyle loan offers a number of advantages, among them:

Loan limits up to $252,700

Eligibility for one to four units, second homes and condos

No required repairs

No minimum renovation amount

No restrictions on improvements.

The HomeStyle loan program extends to investor-owned properties, as long as they are single family, and most improvements are allowed, "as long as, when the house is completed, the value is there to support the loan," Hoover said.

He added, "If you go out to buy a house and see it needs repairs, most places will loan only on the value of the house as it sits. We loan based on what it will be worth" when the renovations are complete.

The emphasis in both loans is revitalization, Hoover said. Renovation Plus representatives have been working with cities all over to help revitalize neighborhoods. It is not cost-effective to tear down the older housing stock and rebuild, Hoover said, plus to do so can diminish the character of a neighborhood, he added.

Hoover recently participated in a home buyer seminar in west central Springfield focusing on the 203(k), and another such seminar is slated for Feb. 11.

Hoover said he has approached the city of Springfield regarding 203(k) loans, and he ultimately hopes for city involvement.

City officials "right now are just watching us to see how we handle it. We have done some work with some municipalities outside St. Louis," Hoover said. There, cities are providing cash assistance to home buyers.

"I'd like to see the city of Springfield move in that direction," he said.

Hoover added, "People that hear about the (203(k)) like it," but the problem is "getting the word out."