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Phil Dumouchel

Renovation and Repair Escrow Loans

Wednesday, September 11, 2013 - Article by: Phil Dumouchel - TD Bank - Message

Renovation Loans are a single first (primary) mortgage and may be used to either purchase or refinance and improve/repair a home. There is not a separate loan for the renovation work. Depending on the type of mortgage, renovation loans are possible for a primary residence, vacation homes and/or rental property. Renovation loans options generally include both FHA 203k (streamline and full) and conventional HomeStyle (or HomePath) options. The primary advantage is that the mortgage (effectively) include the costs for the repairs and/or improvements so that out of pocket cash requirements are greatly reduced. The borrowers downpayment or equity needed for the loan is calculated using the value of the home AFTER the repairs/improvements are complete. Example: $160,000 house where the borrower wants to make $40,000 in improvements = $200,000 total. The house must appraise for at least $200,000 with the improvements completed. If this were a purchase, the buyer would generally need at least 5% downpayment based on the $200,000 total cost, or $10,000. Compare this option to some trying to purchase the home as is for $160,000 and coming up with 5% downpayment which is only $8000 but after closing they either have to find an additional loan (not always easy to do) or come up with cash to make the $40,000 in desired improvements.

FHA 203k vs. conventional renovation loans: In general, FHA loans are more flexible allowing for lower credit scores (as low as 640) and higher debt ratio's as well as other underwriting flexibility. Conventional loans generally work better for well qualified borrowers and where the borrower will have at least 5% or more equity in the property.

  • The interest rate on a FHA loan over the past year or so has tended to be slightly lower than for a conventional renovation loan (roughly 0.25%)
  • Mortgage insurance is generally higher than it would be for a conventional loan, in some cases as much as double the cost. Often more than making up the difference.
  • FHA monthly mortgage insurance is required on all 30 year loans for the life of the mortgage. On a conventional loan current laws require PMI to be cancelled after 2 years if the mortgage is paid down to 78% of the original property value (lower of appraisal or purchase price.) Cancellation at any other time may be requested but is up to the loan servicer (the company where you make your payments) based on an updated appraisal that typically must show 25% equity between 2 and 5 years; or, 20% equity after 5 years. (Note: There is no PMI on a HomePath renovation loan which are only available for homes being sold by Fannie Mae.)
  • FHA loans are assumable (subject to qualifying and lender approval)
  • Conventional renovation loans may be used for vacation homes (up to 90% LTV) and investment property (max. 85% LTV)
  • Conventional loans normally may be for as much as $417,000 but FHA loans have limits based on the county where the property is located.There are also a few lenders that offer jumbo renovation loans that are similar to the conventional option outlined above.

Repair ESCROW options: For relatively minor repair or improvement needs some lenders also offer the option of escrowing the cost rather than going through a full renovation loan program. Usually this means the work must be non-structural and is limited to $5000 on a FHA loan; 10% of the value of the home for a conventional loan (max of $15,000); or, up to $10,000 on a USDA/RDA loan.

Pool Escrow: Only want to install an in-ground pool? There are conventional loans which allow an escrow to install a pool after closing.

Rates and Fees: Renovation and repair escrow loans are somewhat more complicated and involve a bit more risk to the lender. You should expect the interest rate to be slightly higher and to pay additional fees to offset the additional responsibilities and requirements for these loans.

* Specific features vary based on applicant qualifications and guidelines for the type of loan.

NOTE: Product general highlights only, subject to receipt and approval of complete application, underwriting, and meeting any conditions for final approval. Loan guidelines subject to change without notice; call for updated information.

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