How does the loan process work for a home that is half-way through a remodel and down to studs?
AC asked:
My husband and I are looking for our first home and have fallen in love with a house that is down to the studs in some areas in the middle of a remodel. The home has no structural issues - it is all cosmetic - but does need all new applicances (has none), new walls (70s style paneling in living room), new flooring (has concrete now) etc. Would we need to get a construction loan even though it is structurally okay? How would the mortgage process work for this?
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My husband and I are looking for our first home and have fallen in love with a house that is down to the studs in some areas in the middle of a remodel. The home has no structural issues - it is all cosmetic - but does need all new applicances (has none), new walls (70s style paneling in living room), new flooring (has concrete now) etc. Would we need to get a construction loan even though it is structurally okay? How would the mortgage process work for this?
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January 3rd, 2009 at 9:49 am
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You do not necessarily need a construction loan, you’d need a home equity loan, though some mortgage companies will allow you to borrow more than the value of the home if need be.
Different mortgage lenders offer different packages, GMAC offers some great ones. Basically the lender can base the value of the home on the PLANS, but typically cosmetic changes won’t impact value as much as you may think.
Some inspectors never go in a home, they basically base it on the size of the home, etc.
You may get a primary mortgage and a home equity loan, and they’d need to get an appraisal based on the plans for the remodel (they’d be submitted). Some lenders will close and give you the money, other lenders may require inspection (post-remodel) before releasing those funds.
It’s best to be very clear.
Chances are you won’t need to do anything special though if it’s mostly cosmetic issues.
January 4th, 2009 at 3:03 am
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We completed a major remodel of our home a few years ago and we needed to refinance our mortgage several times during the remodel process (so we would have enough money to finish the remodel). In each case the appraiser from the lender appraised the home in its current condition. In your case that would be the value of the home with some walls stripped to the studs. Our loan broker (accurately in our case) advised against getting a construction loan because of the high interest rates and difficulties with loan conditions etc. Instead we handled it with Second Mortagages that were provided as credit lines. This worked real well with paying contractors during the course of the remodel.
Fortunately for us, we learned that the value of a home in mid-remodel is not that much lower than when completed. As a result we were able to complete our remodel. However, we had lived in the home for many years before the remodel and had quite a bit of equity built up.
Hope this helps
January 4th, 2009 at 6:39 am
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It wouldn’t work for this house, unless you had around 50% down payment. Lenders and title companies don’t like half way constructed properties. They don’t like these properties because they don’t want to foreclose on these properties. Title companies don’t want to give clear title on these properties because of mechanic liens. It is just a house, fall in love with another, or get out your wallet.
January 5th, 2009 at 1:03 am
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You have 2 options.
One would be to get a an FHA 203k Rehab loan. You need to consult with an experienced Mortgage Banker on this one. I would find one that was in the business at least since the early 1990’s. They were more popular than and you are more likely to find someone who knows what you are talking about. This loan provides you with the funds to purchase and complete the property. The lender will require bids on all the projects and the appraisal is completed as if the home were done. There is one closing and money is set aside into escrow to complete the projects. It is disbursed to the contractors you hire. There are specific details about the escrow that your lender can help you with but it is a very good option.
Two, you could do a construction loan which would then lead to an end (final) loan. This can be done 2 ways. You get a separate loan, typically at a bank that allows for draws of money to complete the home - sort of like building a new home and you are the general contractor. The construction lender will require that you have bids for all the work to be done and possibly plans to show how it will look when it is done. The appraisal is completed as if the house were done and the construction lender will lend you the money based on your credit and what it will take to complete the transaction. You then get a mortgage to pay off the construction loan - The End Loan.
Or you can do what is called a One Time Close. The construction loan and the end loan are closed at the same time. You do not typically lock into an interest rate on the end loan until the work is complete, at which time the loan is modified to the final terms of the mortgage. The beauty of this is that there are less title fees (only one loan transaction instead of 2) and you are qualifed for the end loan and locked into that as long as nothing about the loan terms change so if something changes with your job, etc. it will not affect the end loan. The downfall is that if you come up short on funds (overruns) then you cannot replace that money with the end loan.
BTW - you can’t get a home equity loan on a house you do not own and there will not be any lenders out there that will lend on this home in it’s current condition. Therefore you need to investigate the above options.
Talk to a local mortgage banker/broker in your area for details. They will help you.