None of the major systems worked (HVAC, plumbing, roof), and there was no kitchen. These issues are a big deal when it comes to financing, as a bank will typically not originate loans for properties appraised with condition codes of C5 or C6 (per the uniform appraisal dataset definitions). The minimum standard for a conventional mortgage is condition code C4 as follows:
Since our choice property is worse than the above definition, and we don’t have the capital to buy and renovate the property with cash, I was worried that this was just not going to be a feasible project for us.
Fortunately, I did some research and found that there are several government-backed renovation loan programs available in the US. Both Fannie and Freddie, as well as the Department of Housing and Urban Development (HUD) buy mortgages from banks meeting specific criteria for the purpose of buying and renovating properties in disrepair. However, these loans can’t be used to buy, tear-down, and rebuild a new home. They also come with a litany of rules, and typically a slightly higher interest rate (anywhere from 12.5-100 basis points above conventional).
The three programs we have highlighted below generally follow the same sequence of steps for the borrower:
Find a participating lender and apply for the loan (i.e. get pre-approval for the amount you’d like to spend)
Find a property (we actually did this first)
Get a Home Loan Consultant (the bank will help you out on this)
Get contractor bids and decide which contractor you want to work with
Transmit information about purchase price and improvement costs to lender
Bank will have an appraisal done both with and without improvements
After the appraisal has been accepted the loan can close and the improvement funds are held in escrow and drawn against as work is completed
Once the work is verified to be complete, any remaining funds in escrow can either be refunded or applied to the loan principal.
As far as which program to go with, it depends on how extensive (and expensive) the renovations are, what type of property (primary, secondary, investment), as well as which banks will extend these types of loans.
As far as I can tell this was the first government-backed renovation loan offering. It is offered through participating HUD-approved lenders.
This post was written for the Collected Eclectic blog.
Collected Eclectic was a passion project focused on recording the process as Grace and Michael van Meurer transformed their builder grade home in to something special.
124 blog posts were published between 2018 and 2021. Explore the complete Collected Eclectic archive here.
Learn more about the project here.