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With a plethora of homes still being sold through short sales and foreclosures, home improvement loans are becoming increasingly popular with buyers. These days, many family homes are being remodeled to accommodate additional family members. As rental housing costs rise, families decide to live together and save money. Several situations may apply: boomerang children, aging parents or divorcees with grandchildren – the family home needs to be expanded or renovated so that everyone fits comfortably.

Rehab loans like the FHA 203(k) program or the Fannie Mae HomeStyle Renovation mortgage are also the perfect answer for some first-time home buyers. If the borrower qualifies for the 203(k) program, the buyer can borrow based on the expected value of the home after the home renovation is complete.

I will summarize some common home improvement loans available to consumers and some of the requirements for each. Interest rates are likely to vary for each loan detailed, so be sure to check with a qualified loan officer first, before embarking on a home purchase or refinance.

Renovation loans are effective for consumers, banks, and building societies because they provide the resources needed to remove foreclosures from the market and redo them. Additionally, these loans offer first-time home buyers (who historically make up 30-40% of a healthy real estate market) the opportunity to renovate before moving in.

FHA 203(k) Rehab Loan

FHA-insured home improvement loans are more popular than ever because the resources for renovations are badly needed. A simplified 203(k) loan includes less than $35,000 in renovations. For homebuyers needing more than $35,000 in rehab work, a full 203(k) is required.

To qualify for the FHA 203(k) loan, the borrower must agree to engage a real estate consultant to evaluate the construction plan and sign each phase. The project is to be completed in six months, with five drawdowns (or payments to contractors) allowed. A list of approved property renovations is included with the loan. Many borrowers find this loan too complicated – or the list of renovations too narrow for their plans. But the interest rate on FHA loans is low enough to make it worthwhile.

If you are interested in an FHA 203(k) loan, find a mortgage broker with experience in this type of rehabilitation loan to finalize the transaction. FHA loans are generally available for owner-occupied residences. These loans are government insured and have a more expensive mortgage insurance rate (PMI), with an initial payment of 1.75% and a monthly payment of 1.35%, compared to other loan products. Jeff Hurd, Mortgage Banker at Fidelity Bank Mortgage in Newport News, Va., said, “With conventional rehab loans, the consumer has the option of paying the entire PMI up front, monthly, or having it paid by the lender (LPMI).”

Fannie Mae HomeStyle Renovation Mortgage

Comparing the Fannie Mae HomeStyle loan to the 203(k), Hurd says the HomeStyle loan product offers more flexibility with repairs and renovations and in the types of homes purchased. The Fannie Mae HomeStyle Loan offers a wider range of home improvement projects and can be used on a second home and investment property as well as a primary residence.”

Other advantages of the Fannie Mae HomeStyle Renovation Mortgage include less money than conventional rehab loans (a minimum of 5%) and lower mortgage insurance costs. Monthly mortgage insurance payments are reduced with higher down payments and/or a good credit score above 680. Conventional lifestyle will generally have a PMI price advantage over FHA. With Fannie Mae’s HomeStyle Renovation Mortgage, purchases and home improvements can be combined into one loan for virtually any property – and it doesn’t have to be Fannie Mae-owned. Repairs or renovations must be permanently attached to the structure and add value to the property. Lenders must be pre-approved to sell this product, so be sure to ask the loan officer if they participate in this home financing program.

Rehabilitation loans – now is the time

This is the perfect time to buy a home with a rehabilitation loan. There are so many houses that can be in distress. Whether the house is owned by a bank, whether it is a foreclosure or a short sale, or whether a landlord is upside down and does not want to invest money in a property for the repair – there are houses to choose from. Right now, homebuyers have a great opportunity to buy a home at a bargain price and renovate it with financing. These rehab loan products make it easy to buy a home and complete home rehab projects at the same time, before the move-in date. The odds are excellent that a consumer can buy a property, make the necessary renovations, and walk out of the deal with the equity in the home. Hurd says, “There’s a market of savvy consumers ready to buy these homes now.”

The housing market has changed dramatically over the past five to seven years. Because there are still vacant properties available in this real estate market, rehabilitation loans are a way to secure those properties that are in need of repairs. Homebuyers can now expand their choice of homes to live in, as they can redevelop according to their needs. Real estate investors can buy, rehabilitate and rent or resell the property.

Rehab loans are a great stimulus for the real estate market and a great way for homebuyers to buy what they want without having to worry about liquidating cash investments or having tens of thousands of dollars. in addition to a mortgage loan to finance home renovations.

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Source by Elaine VonCannon