If you're considering a renovation, chances are you've done some asking around of friends, neighbors, and probably Google to try and understand how construction loans work. Here at TLD we help dozens of clients each year renovate their homes, and oftentimes this includes financing the design and construction. Navigating the options can be confusing if you've never been through it before, so we asked our local friend Ryan Miles, a loan originator, to help us shed some light on the options available to help understand which might be right for different project sizes and types. Take it, Ryan!
Over the last two years we’ve spent A LOT of time at home. One thing you may have noticed during that time is that your space may no longer serve you, or maybe it just doesn’t fit your aesthetic. Specifically, in Dallas, the housing market is experiencing a tight inventory squeeze. For many, it just isn’t feasible to sell your home and find (i.e., win the bid war) your new dream home. Or maybe you hit the market lotto and bought a house with great bones, but it just doesn’t fit your vision yet. Either way, the good news is that your current or newly purchased home can be redesigned into your dream home.
If you’re like us and have been reading this blog for a while, you know that it’s often difficult to determine the cost of renovations. There are huge variables that can affect your project’s final cost; from how exquisite your taste to how large or small your project is. No matter the cost, you don’t have to spread yourself thin by going it alone. From loans for older homes that need structural repair to adding an in-ground pool and patio, there’s a product for nearly every project you want to tackle.
My name is Ryan Miles, and I am a loan originator on the Raskin Team of PrimeLending. I’ve been originating loans for 17 years. During that time, I’ve watched the market for renovation grow and along with that the product options get better and better. The Raskin team are dedicated experts who are here to help you not only understand the process, but to find the loan that gets you to your goal. A few of our most popular renovation loan types are: EZ “C,” Jumbo, HomeStyle/CHOICE and Cash Out Refinance. Along with those everyday products some people also opt for construction loans.
EZ “C” or EZ “C”onventional is a Conventional Repair Escrow. As the name suggests, what we love about this loan is that it is easy! The EZ “C” makes it simple to finance upgrades on a recently purchased home over a short period of time. This loan type also helps eliminate duplicate and higher rate fees due to multiple loans which is a win for you and your pockets! EZ “C” covers any cosmetic, non-structural upgrades, either appraiser-required or borrower requested repairs. The repair limit is $35,000 and the renovation must add value to your home so, improvements to bathrooms, bedrooms or the kitchen are the perfect reason to consider this loan type. All costs associated will be rolled into your mortgage, so you will still only have one loan and one monthly payment. See? EZ!
Tour or Tam O'Shanter project
JUMBO RENOVATION LOAN
We know that some homes will require a little more TLC than what that limit entails. Jumbo renovation loans are designed for situations where you need a renovation loan that exceeds the conforming limits set annually by the Federal Housing Finance Agency. As of January 1, 2022, the limit Is $647,200. So, anything at or above $647,200 qualifies as jumbo, and anything less than $647,200 falls under conventional limits. Our jumbo loans are 30- year, fixed-rate loans. Like the EZ “C,” the renovation must add value to the existing property. However, with a maximum renovation or repair limit of $250,000 (or 30 percent of the completed renovation value), there are numerous ways to add value to your home apart from just a typical kitchen or bath upgrade. Under a jumbo Renovation Loan, you can add swimming pools, exterior living spaces and even hardscaping.
If you’re looking for cost updates rolled into the sales price of a fixer-upper, HomeStyle/CHOICE might be for you. This loan option is beautiful because you don’t have to open any additional lines of credit. The rules for this loan are incredibly flexible. Though you can’t tear down and re-build, it does allow for gutting and complete interior renovation. You can update the kitchen cabinets, paint the exterior and more. Unlike some other renovation loans, HomeStyle/CHOICE also allows the construction of a separate accessory dwelling unit or a guest house. You can also include up to six months of principal, interest, taxes, and insurance to cover your mortgage payment. This is an incredible benefit because it allows you to afford to live elsewhere while the renovations are completed.
View the transformation of our Crestover project.
Though a cash-out is not technically a renovation loan product, it can be used that way. If you’ve owned your home for a few years, it’s equity (value) has probably grown exponentially. A cash-out refinance allows you to turn a portion of that equity into cash—cash that you can use for whatever you want. Because you already own a home, have a payment history and your home’s value is more than you owe, it is typically easier to qualify for a cash-out refinance than any other type of loan out there. You would have a new mortgage at a higher amount, but lower interest rates and shorter terms could still offer you significant savings over time.
Getting a construction loan to build from the ground up is a little different than the other products we’ve talked about today. Before getting started there’s a couple of things to keep in mind: you should find a qualified and trusted builder and you still need an appraisal. Finding a builder with a proven track record of excellence makes getting your loan much easier. If you’re choosing to act as your own contractor, you’ll have to meet some additional requirements to prove that you’re qualified for the job.
You might be thinking “how do I appraise something that doesn’t exist?” You’ll need an appraiser to view your blueprints and add in the value of your land before you get started. These types of loans are only allowed in certain situations and mainly when it’s down to the foundation or a very large overhaul pending approval. A construction loan comes as a one-year (12 month) interest-only loan that requires a minimum 20% contingency. After the 12 months are up, the loan is refinanced into a normal amortization product such as a 30, 25, 20 or 15-year fixed rate.
Before and after of our Stonebridge project
All of this is to say, renovation doesn’t have to be a daunting task. Before deciding to renovate, it’s important to know how the process works and which options are available to you. There’s plenty of videos and guides on our (or any mortgage lender’s) website, but the absolute best way to begin is by connecting with a loan expert. The Raskin Team would be honored to be a part of your renovation journey, so please don’t hesitate to reach out! I wish you the best of luck on making your dream home a reality.
Thanks Ryan and Team for your insights and sharing this guest post! Ryan is a great resource, especially for our local Dallas/Richardson/McKinney TX friends. And of course we're always here to help!