Subject Property Not in Perfect Condition? Know All the Renovation Financing Options! Back in the old days Homebuyers had difficulty finding workable financing options for home repairs, renovations and additions. If a home was in poor condition, lenders would either not consider it as acceptable collateral for a mortgage or would insist on repairs being completed prior to closing. If a home was in acceptable condition but buyer wanted to make improvements they would often have to obtain a 1st mortgage to buy the home and then, after closing, take out a 2nd mortgage to finance the repairs/upgrades. This resulted in: Requirement for larger down payments due to the more restrictive 2 nd mortgage loan to value (LTV) guidelines and the use of as is value vs. after improved value. A higher interest rate on the 2 nd mortgage. Shorter repayment terms and/or balloon payments. Additional closing costs because of need for 2 loans. 1
The first true renovation program was the FHA 203k. Today there are conventional mortgage options also FHA 203k Streamline Maximum $35,000 for non structural repairs Full 203k Renovation Use for major repairs Both programs allow 3.5% down payment. Conventional Fannie Mae HomeStyle 95% LTV up to $625,500 (for DC Metro Area) Renovation/Permanent When you re working with a high dollar property and planning large scale renovations. What is the best renovation program for my home buyers? All mortgage renovation programs have their place. Most have heard of the term 203k because this program has been around for many years. Factors such as type of property, owner occupancy, size of project, length of time for completion and financial strength of borrower must be considered. Situation: The property only needs small repairs? Ask your lender about an escrow holdback. 2
Escrow Holdback for Repairs can be used for FHA, VA and Conventional mortgages! Perfect for small repairs: Interior/exterior painting, Replace /repair rotted wood, Install carpeting/flooring, appliances, windows, etc. Just about any project can be completed quickly Seller OR buyer can fund all or part of escrow money. Cash strapped sellers pay out of equity proceeds and not actual cash Buyer can choose their own contractor, colors/finishes or quality of appliances Can Escrows Save My Contract? In many cases YES! Use when home inspection shows repairs that seller can t or won t make. Suggest prior to final walk thru when seller, who is already paying buyers closing costs forgets or has become too busy to make promised repairs. Consider after final walk thru when additional contract covered deficiencies are revealed. Because some bank owned properties have been vandalized they are difficult to finance With an escrow holdback, a buyer could price out costs of purchase and installation of new appliances and flooring at time of contract and fund their own escrow at closing with repairs completed the week after closing. 3
Escrow for Repair vs. Seller Closing Cost Credit Are you really going to guess what it will cost to repair the buyer s air conditioner and ask for a closing cost credit? Why not get an estimate from a professional HVAC contractor and have 150% of the estimated funds escrowed at closing and repaired immediately afterward. Using an Escrow Sounds Great What s the Catch? Not all lenders will allow escrows after closing; ask before you include in contract. Maximum size of escrow can vary between lenders. Rule of thumb is $10,000 ask lender their maximum. Cannot guess on amount to escrow lender will require written estimate from licensed contractor. Homeowner or seller can not perform work/repairs. Lender requires licensed and insured contractor to perform the work. Escrow funds cannot be saved for later use. Lender requires all work to be repaired immediately after closing Typical deadline is 2 weeks after closing. 4
How do I structure the escrow? After obtaining written estimate from chosen licensed contractor; determine who will pay for the escrow. The escrow funds can come from the seller or buyer or disinterested party (i.e., Uncle Joe, Grandma, etc.) or a combination of both buyer, seller, etc. Lender will require 150% of contractor s estimate to be escrowed to provide cushion against cost overrun and to ensure work is completed satisfactorily. Cost Overrun?? Typically not an issue when estimate is from highly regarded contractor. Party that funded 50% cushion would have any remaining funds returned after work is completed. Lender will send appraiser out for final inspection. Typical inspection fee is $100 (added to Closing Document (CD). Situation: the repairs are more than minor and can t be done in a few weeks? Consider an FHA 203k Streamline 5
FHA 203K Streamline Streamline 203k less paperwork; simpler process than full 203k. Used for minor rehab/repairs including cosmetic repairs. No structural repairs/improvements allowed Maximum amount for repairs is $35,000 Includes minimum 10% contingency reserve required on all projects. Maximum loan amount = 110% of as completed appraisal. FHA 203k Streamline logistics: Typically need 45 60 days for closing due to buyer working with contractor to determine scope/cost of renovation. Appraiser is given list of desired repairs and their cost estimates to calculate after improved value. Two draw process: 1 st draw issued at closing for 50% of renovation. 2 nd draw issued after final inspection Repairs must be completed in 60 days or less Final draw paid to borrower but check made payable to them and contractor Borrower must endorse check to disburse to contractor. FHA 203k Streamline is Excellent for both Interior and Exterior Repairs 6
Examples of Streamline Exterior Repairs: Repair/Replacement of roofs, gutters and downspouts. Painting and weatherization includes storm windows/doors, insulation, weather stripping, etc. Repair/replace/add exterior decks, patios, porches. Window and door replacements and wall re siding. Septic system and/or well repair or replacement. Accessibility improvements for persons with disabilities. Lead based paint stabilization and/or abatement Example of Streamline Interior Repairs: Repair/replacement of flooring and minor remodeling, such as kitchens (nothing structural) Repair/Replacement/upgrade of existing HVAC, plumbing and electrical systems. Purchase and installation of appliances including refrigerators, ranges, dishwashers, washers/dryers and microwave ovens. Basement finishing and remodeling and/or waterproofing. Accessibility improvements for persons with disabilities Lead based paint stabilization or abatement. 203k Streamline Ineligible Repairs: Major rehab/remodeling and anything structural such as the relocation of a load bearing wall. New construction (including room additions). Repairs requiring detailed plans/drawings or architectural exhibits. Landscaping or similar site amenity improvements. Rehabilitation activities that require more than two 2 payments per specialized contractor. 7
Ineligible 203k Streamline Repairs Continued Repairs that will: Take more than 6 months to complete or Will result in work not starting within 30 days after loan closing; or Cause the borrower to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. FHA anticipates that, in a typical case, the homeowner would be able to occupy the property after mortgage loan closing. Situation: The repairs are more than $35,000 and/or my buyer also wants to add a new addition. You have two options: Fannie Mae HomeStyle or Full FHA 203k Renovation Fannie Mae HomeStyle Most flexible of major renovation options. Despite flexibility, typically still need 45 60 days from contract to closing due to: Buyer working with contractor to determine scope of work/cost of renovation Lender reviewing contractor qualifications license, insurance, reputation, financial stability. Appraisal being delayed until scope of work, contractor s cost estimate and contractor s qualification have been finalized. 8
HomeStyle Renovation Basics: Can be used for both structural or cosmetic repairs Can be used for primary residences, 2 nd homes and rental properties. Maximum renovation amount = 50% of the after improved value. Other 50% used to acquire home or pay off existing lien (if refinance) Must use some part of existing home part of foundation, wall, etc. Key is choosing improvements or adding square footage that will add value. HomeStyle Example: Sales Price: $300,000 plus $100,000 for renovations/additions Appraiser is given plans/specs and appraises house for $400,000 AFTER IMPROVED VALUE (subject to completion). Lender allows 95% financing = $380,000 Buyer pays 5% down payment = $20,000 Note 1: this 5% of total purchase/renovation cost Note 2: $20,000 does not include closing costs Lender only funds $280,000 of $300,000 purchase price to complete purchase at closing. HomeStyle Example Continued Borrower signs note for $380,000 ($280k disbursed at closing and $100k remaining to fund renovation). Seller/Realtor out of picture after closing. Contractor/Lender work together to distribute remaining $100,000 based on agreed upon draw schedule. Contractor requests draw; lender orders inspection to confirm progress towards completion and bring down on title to confirm absence of mechanic s liens by subcontractors. 9
Basics for Full FHA 203k: Eligible for primary residences only. Luxury items and improvements are not eligible. Adding a deck? Yes Adding a pool or barbecue pit? No You may be required to repair items that you didn t intend to fix to get FHA approval All health, safety and energy conservation items must be addressed prior to completing general home improvements. Expect closing to take 60 90 days due to additional paperwork & approval process. Caution sellers may balk at extended approval and closing timeframe. Logistics of Full 203k Work with HUD consultant to write up scope of work. Borrower pays consultant fee up front Typical fee: $750 $1,500 Scope of work is sent out for bid by contractors. Approved contractor s bid/plans sent to appraiser If architectural plans needed, cost can be included in loan. Logistics of Full 203k continued Appraiser provides both As Is Value AND After Improved value. Max. loan is 110% of After Improved value Consultant, Contractor and Lender work together 10
Function of the HUD Consultant Meets with buyer to determine what will be required by FHA to meet minimum standards Focus on health, safety, energy efficiency First $5,000 of renovation budget must be spent to meet these items Discusses other upgrades or requirements the buyer might have. Prepares scope of work write up for owner to bid out to contractors. Coordinates the repair work write up with contractor and lender Makes inspections on property to authorize release of funds (draws) from lender to the contractor. To Find an Approved FHA 203k Consultant, just go to www.hud.gov Repairs Required for first $5,000 Thermal repairs: caulking, weather stripping, insulation, attic ventilation Smoke detectors Wood boring insects Moisture problems and mold Well/Septic repair and certifications Elimination of health and safety concerns. 11
Before Writing a Contract It is best to identify feasibility What does buyer want to do to the property? Determine approximate cost Analyze comparable values in the neighborhood to support the desired improvements Will the home be over improved for the area? Best thing to do is bring in contractor up front. Note: Funds can not be released in advance; discuss with contractor as they prefer up front deposit. Things to Remember When Starting Write contract with 203k financing Set up appoint. with HUD consultant the first week. Get termite completed at same time If there is damage, it can be included in the work write up Allow plenty of lead time with appraisal contingency dates. NOTE: Appraisal is not ordered until after the work write up is complete and buyer selects contractor (and contractor approved by lender) Situation: The house is already quite large and the buyer is basically knocking it down or adding significant addition! Welcome to Renovation/Permanent Financing 12
Renovation/Permanent Financing Provides flexibility in terms of loan amount. Other programs are limited by conforming loan limits for the area $417,000 or $625,500 Provides flexibility in terms of loan size as HomeStyle limits funds for renovation to be no more than 50% of after improved value. Provides flexibility in terms of completion time as 203k requires work to be completed within in 6 months. Larger projects usually take longer to complete. Renovation/Perm larger renovation will require larger down payment Required down payment is typically 20% or more of Acquisition Cost. Acquisition Cost = sales price of house + cost of renovation. Larger project = larger contingency reserve. A renovation/permanent loan is traditionally 2 loans: a reno loan and a perm loan. Renovation (short term) loan is typically based on a prime plus rate (prime rate + X%) during the time the house is being renovated. Permanent (long term) loan is traditional mortgage that borrower modifies to after renovation is complete. 13
Key Difference when reviewing renovation/perm financing options: Key difference between lenders is whether or not they have a single close or a two time close. Single close has less closing costs and gives borrower longterm rate protection so they know the permanent mortgage rate and terms before they start renovation. Tips to help guide your buyers through the home renovation/repair process Always work with reliable, licensed/insured contractors. Know the difference between Class A and Class B contractors. Request recent references and check them out for: Quality of construction, workmanship and materials Customer service and ease in handling change orders. Responsiveness via phone, e mail, etc. Continuation of work in between lender draws (i.e., sufficient cash flow to make payroll & materials) Meeting deadlines for completion and punch lists. Coordination Between Professionals: Be aware that lenders will want to review/approve your buyers choice of contractors allow time for this process. Make sure the lender and contractor are communicating with each other, working together and have agreed on the draw schedule Draws = timing/schedule of payments to fund improvements) 14
Cash Available, Cash Reserves and Cost Overruns The good news Several of renovation financing options only require 3.5% 5% down payment! Reminder: down payment is not based on sales price only but rather the lower of sales price + cost of renovation or after improved value The bad news things happen when a house is being renovated. Even with planned contingency reserve, buyers with limited cash can run into liquidity problems if additional repairs/costs are required during the renovation process. Always discuss need for liquid reserves with your buyers. Renovation Summary From Small to Large Escrow Holdback for repairs @ $10,000 15,000 FHA 203k Streamline for FHA buyers who want $30,000 or less of non structural repairs Fannie Mae HomeStyle for small, medium and large renovations to primary residence, 2 nd homes and investment properties FHA 203k the original of all mortgage renovation programs for medium & large reno Renovation/Perm Two part loan when your buyer has large home and wants extensive reno. Less Common Renovation Situations: Best Program Renovation Situation/Property: to Use: Comment 2nd Home Renovation HomeStyle FHA 203k can only be used for primary residences. Higher down payments may be required. May need renovation/perm if loan amount exceeds conforming limits. Rental Property Renovation HomeStyle FHA 203k can only be used for primary residences. Higher down payments will be required. Conversion of SFR to Multi Unit FHA 203k One unit of multi unit must be primary residence Conversion of Multi Unit to SFR FHA 203k Must be primary residence 15
Q & A Poll of class any real life renovation success or horror stories? What type of financing did you use? What did you learn from the experience? Discussion Thank You!! John F. Slye NMLS # 22903 Area Manager/Vice President Fidelity Bank Mortgage Direct: (703) 466 4010 Cell: (703) 609 2181 E mail: john.slye@lionbank.com 16