Renovation Costs can be Bundled with Mortgage

Finally, you've found a house in a great location that falls within your budget, but it needs work. Major work. You're wondering just how you can swing both a mortgage payment plus repair or renovation costs.

Fortunately, you have several financing options. These include the Section 203(k) mortgage, available through the Federal Housing Administration, or FHA. Another product is Fannie Mae's HomeStyle Renovation Mortgage. In addition, some private lenders offer their own mortgage products geared to buyers of fixer-uppers.

These programs allow home buyers to finance both a mortgage and the construction work in one shot.

"These provide a great opportunity for folks to buy a more affordable house that needs work and at the same time be loaned the money to bring it up to their standards," says Tim Doyle, director of government affairs with the Mortgage Bankers Association.

Doing everything at once can save time and money, as it eliminates the need for two appraisals, title searches and the like. And, while interest rates on the products vary, most are comparable to rates on standard mortgages.

Perhaps the most well-known product in this group is the FHA's Section 203(k) mortgage, which combines the cost of renovation and the purchase of the house within one loan.

These mortgages are available across the country and can be used on homes in urban, suburban or rural areas, as long as they're at least a year old. The planned renovation work has to total at least $5,000. Interest rates are in line with those for typical home loans.

Here's how the process typically works: The borrower, having found a house that needs renovation, heads to a mortgage lender that handles 203(k) mortgages. The borrower hires a HUD-approved consultant who identifies the rehabilitation projects that are most urgent. Then the lender hires an appraiser to determine the post-renovation value of the house. This is key because the benefit of the 203(k) is that you use future value or the expected value after the improvements are made.

For example, if a home costs $100,000 and will require $25,000 in improvements, the loan can be for the entire $125,000. The portion of the loan earmarked for improvements is disbursed in installments as the work is completed.

Fannie Mae's HomeStyle Remodeler is similar to the Section 203(k) program, but it doesn't require the use of a consultant. However, the borrower has to find a licensed contractor who submits detailed work plans and specifications to the lender, says Jim Matheson, senior product manager with Fannie Mae. Before signing off on the loan, the lender determines whether the work proposed is likely to add value to the property.

Some private mortgage lenders have their own programs for borrowers looking at a handyman special. One is the Plus Mortgage program offered by Market Street Mortgage Corporation, Clearwater, Fla.

"This program allows people to purchase homes or refinance existing homes and include the cost of improvements," says Randy Johnson, president and chief executive officer.

Plus, mortgage loans can be used with either FHA or conventional loans. Conventional loans aren't subject to the FHA caps.

Under the Plus Mortgage Program, the mortgage amount is based on the current market value of the house, plus the cost of the renovation work. As with the Section 203(k) mortgages, however, the portion of the loan that covers the renovation projects is disbursed in installments as the work is done.