Factoring in Home Improvements

By Marcus McCue, vice president of Guardian Mortgage Co. Inc.

[Editor’s Note: This marks the inaugural installment of a new monthly feature about home mortgages to appear on East Dallas Times. Your feedback is welcome.]

Older East Dallas homes — and neighborhoods — found renewed vigor in the past couple of decades as buyers invested in their properties, often with home loans that incorporated funding to make renovations and repairs upon purchase.

Many of the most common loan programs that allowed borrowers to make substantial improvements to a property after closing — with some or all of the cost of those improvements financed into the purchasing financing — are no longer available.

These programs have been phased out in today’s economy due to mortgage lender risk aversion with loan approvals and concern over property value stability and decline. But there are still loans available under different terms and conditions than East Dallas pioneers may be familiar with and the following are a couple of the most common.

Specialized lenders will provide funds to remodel or rehab a property, but these are typically short-term notes no more than three years in term with higher rates and higher fees than traditional mortgages. If the borrower retains this property beyond the rehab loan term, they will need to refinance the unpaid balance on the original loan or restructure the mortgage with the rehab lender.

A Federal Housing Administration program, called an FHA 203K loan (and its sister program called the streamline FHA 203k(s) for less significant improvements and repairs), allows for improvements and repairs to a property after closing. However, not all FHA-approved lenders provide this specific FHA financing and these programs have limitations for the borrower and work being completed.

Due to these current loan parameters, borrowers who are either purchasing a new primary residence or purchasing the new property as a short-term rehab and sale have changed their approach for financing improvements to post-closing home improvement loans. These are second-lien loans at higher rates than the primary mortgage, which allow the borrower to get a “value add-back” for the improvements being made.

The home-improvement lender will have an appraiser review the property and the planned improvements (through a contractor bid and project details, or architectural and contractor drawings) to get to an estimated market value for the home after the work is completed. For lower balance home-improvement loans, generally $50,000 and less, the second-lien lender may provide the borrower with a standard value add-back based on formulas such as “dollar for dollar” or “50 cents on the dollar” for the total cost of the planned improvements.

A borrower who plans to finance improvements or repairs should engage a lender early in the process to understand possible financing limitations. By investing a little more time into the process, homeowners can still help make East Dallas timeless.

Marcus McCue is vice president of sales for Guardian Mortgage, which has financed dozens of East Dallas homes, and enjoys mentoring homebuyers to become smart borrowers. Follow him on Facebook.

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