This tool estimates how much equity you have built up in your home. This number can be used to help determine loan qualification purposes on a loan or a credit line against your home equity for up to four lender Loan-to-Value (LTV) ratios.
Here is a table listing current home equity offers in your area, which you can use to compare against other loan options.
This article will look more closely at how you might strategically think about handling home renovation costs and examine some of the more popular programs available today.
Multiple programs are available to existing homeowners and new home buyers. When you are buying a home that requires some updates, it is important to understand your options. While you can certainly handle a mortgage and renovations separately, there are ways now for you to combine the costs into a single loan. A single loan has advantages.
The Federal Housing Administration backs the 203(k) loan program. This is a program designed to help individuals combine the purchase (or refinancing) of a home with the costs of its rehabilitation, or to simply cover the costs of renovations to an existing home.
The FHA guarantees the loan but does not actually provide them. Local lenders will offer the program to qualified applicants.
The home being financed and rehabbed must be at least one year old, and the rehab efforts must be a minimum of $5000. The total value for the property must fall within the FHA mortgage limits for that specific area.
The convenience that lower-income applicants find with other FHA loan programs will apply here as well, and users of the program will tend to save time and money.
HUD will require that the finished property meets certain energy and structural requirements. They will also govern the types of rehabilitation covered, including:
HUD also likes to see improvements to the property that help safety, energy efficiency, and even some aesthetic appearance issues. There are other specifics to review, which are all outlined on the HUD website linked above.
Depending on the costs and your ability to qualify, you might use the 203(k) to cover the money needed for new appliances, basement waterproofing, HVAC system updates, windows and doors and more.
203(k) loans will have either fixed or variable interest rates. A Limited 203(k) offers a faster closing with limited paperwork and is usually aimed at less expensive projects (a max of $35,000 is imposed), while the Standard 203(k) has no maximum repair limit, and requires a minimum of $5000.
Note that lenders may impose their own fees for closing and other associated costs. HUD will not impose any fees of their own on a 203(k) loan backed through the third-party lender.
When the upgrades are complete, the home will have to pass an FHA inspection. For this reason, most often, a 203(k) loan is going to require the help of outside contractors, opposed to covering DIY home improvements.
If you don’t find that either of the 203(k) programs are offering what you need, you may still find other options through the FHA and HUD. One such loan is the Title 1 Property Improvement Loan.
The Title 1 is something like the standard 203(k), without the addition of the mortgage rolled in. It can be applied to both residential and nonresidential properties. There are limits imposed on the amounts for secured and unsecured amounts borrowed, and different levels are allotted for the various tasks to be completed.
For example, fire safety measures are allowed up to $50,000 in secured loans, while other issues standard have a cap of $25,000 in secured loans for a nonresidential property. Historic preservation for residential dwelling(s) is another upgrade covered by Title 1 Property Improvement loans.
Check with a HUD representative to see if your efforts will fall under title 1 loan consideration.
If you already own the home you are looking to upgrade, renovate or remodel, you may have other choices to evaluate as well. Using some of your earned equity in the form of a home equity loan or a home equity line of credit (HELOC) can be a smart way to accomplish your goals.
The main difference between these two lending products, is the disbursement of funds and the repayment period. A home equity loan will disburse the funds in a single lump sum. A HELOC allows the borrower a specified draw period, during which he/she can withdraw up to a set amount, followed by a repayment period, where the borrowed funds are repaid.
Depending on the type of project you are addressing, either of these options may be the smart move.
The HELOC’s advantage is an ability to borrow only what is needed and using the account more or less like a credit card. If you are facing multiple contractors to complete the job at-hand, a HELOC might be the best move for you.
Conversely, if your project has a single, set price like a new roof or a basement waterproofing, the home equity loan may make more sense, as it allows you to get the costs covered and immediately begin repayment.
Home equity loans might carry lower interest rates than a HELOC, but the HELOC allows you to only borrow (and pay) on what you need/use.
Interest rates and terms will vary by lender, but equity loan products should be pretty comparable to a 203(k).
Obviously, home equity products require a build-up of equity to tap into. If you are living in your home and wish to upgrade it, it would make sense to compare equity products to the 203(k) and other HUD options.
The 203(k) has great strategic benefit when you find a home you WOULD buy, if it weren’t for… [insert upgradable issue here].
In all these cases, the improvement is added to the single mortgage payment, so the interest on it (the improvement) is also tax deductible, which is an added benefit to consider.
The type of work you need to accomplish, and who will be performing it is also a consideration to weigh-in. DIY projects are usually not going to be the best ones for 203(k) loans, because the FHA requirements will stipulate professional contractors, adhering to plans and timelines.
DIY projects are a bit looser, so they are less dependable for lenders. The quality of work is not as consistent, nor are the timelines – so if DIY is your direction, you want to think of other options than the 203(k) for the financing.
The key in taking advantage of the 203(k) loan program, is understanding that it exists, and what it will cover (or not). Many of these specifics can be learned from talking to a HUD advisor or finding a HUD lender in your area on the HUD site. A search there, will limit the lenders to those who have provided a 203(k) within the previous 12 months.
The basics boil down to:
When all of these basics fall together for you, you can enjoy the benefits of a 203(k) loan. Yet it is important to remember, that even without this simple program, you likely still have options to get the loan you need for renovations, upgrades and repairs.
Rates are still low.