Searching for that perfect home is tough, whether you are a young couple seeking the best school district or a retired couple wanting proximity to golf courses and hospitals. I know because I’ve moved in lots of different situations. Sometimes you find a great home in the perfect neighborhood, just close enough to what’s important. Ok, so it may need a few things, but for you, it’s perfect. Sounds like a dream come true.
Your dream home may sell for $400,000, but it needs a little work – changes to the kitchen, new paint, carpet, things like that. Let’s say your upgrades or repairs cost about $30,000. After moving costs, who has an extra $30,000 for repairs? What a nightmare! The answer might be a renovation loan that rolls remodeling costs into the mortgage.
Working the Numbers
Here’s how a renovation loan lets everyone come out a winner. As the buyer, you have a contractor prepare a detailed estimate on the changes you will make. Your loan officer makes certain that the appraiser has this estimate in hand when he or she does the appraisal.
Thanks to your remodeling plans, the house appraises for the full $430,000, sale price plus renovation. When the deal closes, the seller gets their $400,000 and the remaining $30,000 goes into an escrow account to pay the general contractor once the work is completed. Your dream home becomes a reality.
Sometimes it is appraisers that force the issue on repairs. Just imagine, you love the location, but the house won’t appraise unless certain changes are made. Now comes the ugly questions. Who will pay for the repairs, the seller? It is their house, after all. Maybe they don’t have the money. Will you, the buyer, pay for repairs to a house you don’t yet own? Remember, this is still the appraisal stage. Heck, there could probably be some sort of cost sharing negotiation at this point.
Again, a renovation loan might be the answer. Provided the house appraises based on sale price plus repairs, the deal goes through. The seller is not stuck with the whole bill, and the buyer owns the home before any repairs start. As an added bonus, repair costs are rolled into the loan, keeping much needed cash in the buyer’s pocket. After all, there might be a recliner or dining table that would go perfectly in your new house.
A Quick Summary
So let’s recap here. Sometimes you fall in love with a house that needs a few changes. Whether we’re talking about improvements that you want or fixes required by an appraiser, these unexpected costs can really bust the budget. When changes to the property are needed, but cash-on-hand is short, renovation loans are a great way to go.