West Hawaii Real Estate | December 21, 2018 15
early Expand your homebuying options with a fixer-upper mortgage
It’s the lament of first-time
homebuyers in just about every
housing market: There aren’t
enough entry-level homes
available that are move-in ready.
One solution is to broaden
the search to fixer-uppers. With a
renovation mortgage, you can get one
home loan that combines the purchase
price with the cost of improvements.
Not enough affordable homes
Entry-level homes are scarce,
whether new or used. Most gains in
housing inventory have been in upscale
homes, according to Realtor.com.
The decline in entry-level new
construction is stark: 36 percent of
homes built in 2000 had under 1,800
square feet; in 2017, 22 percent did,
according to the Harvard Joint Center
for Housing Studies.
As for existing homes, resales of
homes costing $100,000 to $250,000
were down 1.9 percent in October,
compared with a year earlier,
according to the National Association
of Realtors. The demand is there:
Even with the decline, homes in
that price range accounted for 40.2
percent of sales.
Faced with a shortage of
affordable homes, it makes sense
to consider buying and fixing up
dwellings that are outdated or in need
of repair.
The two major types of
renovation loans are the FHA 203(k)
loan, insured by the Federal Housing
Administration, and the HomeStyle
loan, guaranteed by Fannie Mae. Both
cover most home improvements,
whether major or minor.
“Basically, every kind of repair that
can be done to a property, we do it,”
says Brad McMullen, vice president of
renovation lending for PrimeLending,
a national mortgage lender that
emphasizes renovation loans.
Renovation loans expand options
Both FHA 203(k) and HomeStyle
can be used for structural and
cosmetic renovations. With both loan
types, renovation work may begin
immediately after closing.
FHA’s 203(k) loan is for primary
residence s only. It requires a
minimum credit score of 500 with a
down payment of at least 10 percent;
a credit score of 580 or higher allows
a down payment of 3.5 percent.
These loans can’t be used for work
that the FHA deems a luxury, such as
installing a swimming pool.
There are two types of 203(k)
loans: limited and standard. The
limited is for renovations costing
$35,000 or less that don’t require
major structural work. The standard
is for projects upwards of $35,000 or
involving major structural work.
A 203(k) standard loan requires
a HUD consultant, who helps the
homeowner solicit and analyze bids
and oversees inspections of the work.
Consultants are often contractors,
architects or inspectors, McMullen says.
HUD has a tool to search for consultants.
Fannie Mae’s HomeStyle loan
may be used to buy and fix up a
primary residence, second home
or investment property. It requires
a minimum credit score of 620.
Minimum down payment is 3 percent
or 5 percent, depending on whether
the home is owner-occupied
and the borrower is a firsttime
homebuyer or has a low
to moderate income.
HomeStyle loans
have few restrictions on
improvements, other
than that they “should be
permanently affixed to the
real property (either dwelling
or land),” according to
Fannie Mae guidelines. That
means HomeStyle may pay
for adding a swimming pool.
Pitfalls to watch for
The most common
problem is failing to get
detailed cost estimates,
McMullen says. To prevent
cost overruns, make sure
estimates are specific about
materials, and include costs
for inspections, permits and
consultant fees (if applicable).
Another pitfall: overimproving
the home. If every
house on the block has one
story and three bedrooms,
it might be a bad idea to
add a second story with
two bedrooms. The home
will no longer fit in with the
neighborhood, and it will be
difficult to get an accurate
estimate of the home’s postrenovation
value because of
a lack of nearby comparable
houses.
Getting started
After finding the house
you want, choose a lender,
decide on a loan type and
hire a HUD consultant.
Then, with the consultant’s
guidance, get estimates from
contractors. Your lender will
need copies of the estimates.
The renovation work may begin
immediately after you close the loan.
When the improvements are
complete, you’ll have your home the
way you want it — sooner than you
might have thought possible.
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