Home ownership. It’s a large part of the American dream. The stability that comes with having a place to call your own, a refuge from the stress and competitiveness the world creates. When you own your own home you can design it and renovate it to fit your own needs and wants.
Before you begin your home renovation you first have to determine how you’re going to pay for it. The most affordable option is to pay for it out of pocket. No paperwork, no need for loan approval, and no interest are great benefits; however, if you are planning a room addition or other large scale project it may take a while to save the required funds. For many this is a more realistic option for single room remodels or finishing work.
For projects that need to be done quickly there are several financing options. Traditionally home owners took out a second mortgage or line of credit for home renovations. But since the housing market took such a hit during the recession those loans are harder to come by. An option that has been available for years but rarely used until recently is a home renovation mortgage—the FHA’s 203(k) and Fannie Mae’s Homestyle program. Buyers are able to get a mortgage based on what the projected worth of the house will be after is renovated. This has been a popular choice for many since there are still a large number of foreclosed homes on the market, many of which need a lot of work.
The requirements and process for each program vary slightly. Homestyle requires borrowers to have a minimum credit score of 680 and a minimum of 5% down. The requirements for the 203(k) are less stringent however the insurance premiums are higher for those who put less down. Any funds borrowed through either of these programs must be used towards the house. Homestyle requires an initial and final inspection. On the other hand the 203(k) requires much closer monitoring. An inspection is made every time there is a draw from the account, there is a maximum of 5 draws, and the money can’t be used on luxury items such as pools. The maximum amount that you can borrow is set by the area in which you live but also can’t be more than 110% of the projected value of the house.
Embarking on the journey of home renovations is a big step. Weighing all of the options of payment and deciding which home projects to pursue and which to hold off on requires a lot of time and consideration. In most cases it won’t be a fast process but the end result will be worth the wait.
Liza Stevenson writes about mortgages, lending, and other financial matters for money management sites.