House hunting? If so you’ve seen the deals. Foreclosures & Short Sales in disrepair, dilapidated, outdated, tired and, for the most part, deeply discounted. Leaky roofs, broken windows, dated kitchens, mold, water guzzling bathrooms are just a few of the problems you’ll find. Enough to scare away buyers and lenders alike. However, the savvy home buyer, armed with the knowledge of FHA 203K & Fannie Mae HomeStyle renovation loan capabilities, looks at a dump and see’s something different, they see opportunity. With the guidance of the right lender offering the right mortgage products and a Realtor with an eye for potential, these homes offer home-buyers a way to purchase a deeply discounted house, finance all the renovations, make the house energy efficient and to create instant equity and generational wealth. How do they do that? It’s really quite simple, most lenders don’t have the products needed to finance these properties, many of the ones that do offer renovation products don’t have loan officers with the know how or the inclination to make it happen. Renovation loans require expertise, 99% percent of the mortgage industry doesn’t have it. This leaves properties that sit, they sit because of the lack of financing options and the lack Realtors who have vision. The longer the property sits, the better deal a savvy home buyer will get.
Choose Your Team
Do your research. Specialty loan programs like FHA 203K, EEM’s and Fannie Mae HomeStyle are not available at very many lenders. The ones that do offer them have few mortgage loan officers that specialize. Ask at least these 3 questions to any prospective renovation lender. Don’t stop there though, Google their name, check their LinkedIn, check the BBB and read their blog posts. Don’t end up an internet horror story, choose the right lender.
Realtor selection is equally important. If you have selected the right lender then chances are they will know a Realtor with the right vision and expertise to help you successfully navigate the property selection and negotiation side of a renovation transaction.
Property Selection
What property type will maximize my return? This one is easy, you have to look for properties not eligible for traditional financing. These properties MUST HAVE a renovation loan to be financed, sans that the offer better be cash. So, what am I looking for? If you are a FHA buyer this one is easy, anything. If the house isn’t move in ready then traditional FHA financing won’t work. What does move in ready mean actually? Want a CHECKLIST?! Shoot me a quick message and I’ll send you my handy guide.
How Does My Green Renovation Loan Work??
From a credit standpoint FHA 203K & HomeStyle Renovation loans work much like their traditional financing sisters. The loans (and the expertise needed to do them) lie in the property aspect of the deal. As we mentioned above, renovation loans are not concerned with current condition of the property. All deficiencies will be addressed via the renovation escrow account. How is the renovation escrow determined?
For FULL FHA 203K & HomeStyle Renovation loans the escrow account is based on the bid of a licensed General Contractor + 10% Contingency Reserve + Draw Inspections / Title Update fees. How many draws depends on the scope of the work, how much the inspection fees are depends on a number of factors, including geography.
On FHA 203K Streamlines the contingency reserve is usually optional. While some lenders require it, FHA does not. Therefore it largely depends on which lender you use as to whether your Streamline 203K includes it. Sometimes scope of work OR if the utilities are not on at appraisal can dictate the addition of a contingency reserve to your renovation escrow.
What Are the Best Ways to Make my Renovation Green?
Start with the BATHROOM. Dated homes have water guzzling bathrooms, that’s a fact. In some areas of the country, like DeKalb County in Metro Atlanta, you don’t have a choice but to renovate those bathrooms. Low flow ordinances REQUIRE you to cut down on your water waste.
Bathrooms are not the only energy suck, kitchens and their appliances, HVAC systems and energy efficient windows are all excellent renovations you can easily do to save thousands on your annual energy bills. I have previous posts HERE and HERE that offer up a few quick and easy ways to reduce your energy consumption.
How Do We Tell if What Our Energy Savings are Going to Be?
That’s easy, get a HERS (Home Energy Rating) Report. In fact if you tack on a Energy Efficient Mortgage to your FHA 203K or HomeStyle green renovation you will be required to show the energy savings via a HERS report. RESNET has a comprehensive list of energy raters in your area, that is always the first place I start my HERS report search. You can also find green certified contractors there!
We’ve Closed! How Are the Renovation Escrow Draws Disbursed?
Depends on the type of loan you have chosen.
The draw process for the Full FHA 203K and the Fannie HomeStyle. Require a 3rd party to inspect before funds can be released. For the 203K a HUD Consultant will inspect the work as it is being done before any draws are released. Full 203K loans have anywhere from 2-5 draws depending on the scope of work and the financial capability of your contractor. The first draw will typically NOT be released until all the permits are in place. In other words get your PERMITS FIRST! Once you have your permits and have done a portion of the work you’ll schedule a time for the Consultant to inspect and if he finds everything satisfactory your should have your first check in 3-5 business days. The process is nearly identical on the HomeStyle, however many banks forgo the HUD Consultant and use a 3rd party company like Granite Loan Management or Trinity for the inspections.
On the streamline 203K loan you’ll get between 35-50% of the funds upfront and the rest when the work is completed and inspected. I have a more detailed article on the DRAW PROCESS under the link.
Renovating green is as easy or hard as you make it. If you’ve chosen the right lender, the right Realtor and the right contractor your process will undoubtedly be smoother than those who make a more hasty decision. Have more questions? No problem! Get in contact with me and I will go into as many specifics as you like!
Jonathan Blackwell
404-551-3845
