Life's too short to have a home you don't love.
Whether you are looking to install the countertops and cabinets of your dreams, tear out a wall and expand your master bath, invest in a fixer-upper, or start from scratch, a renovation construction loan may be your solution to creating a space worth showing off.
What is a Renovation Construction Loan?
A renovation construction loan covers both the cost of purchasing a home and the cost of performing major renovations. It differs from a traditional home refinance in that you are borrowing against the value of your home after the renovations are complete. This type of loan is a good option for individuals looking to take advantage of the increased equity on their home that the remodel will result in — assuming the remodel will add a significant amount of value to the home. The loan amount is then based on the anticipated value after renovations.
The biggest benefit of a renovation construction loan are that you are able to purchase and renovate your home at the same time, while still making one monthly payment to cover both costs. You don't have to worry about taking out a second loan after the purchase — likely at a higher interest rate — and you can start repairs / renovations immediately after closing. Additional benefits include:
- One application and one closing
- It broadens your available home and living area options.
- You can customize a home to your wants ands needs.
Other Types of Construction Loans
Construction-to-Permanent loans finance the construction of a new home and then convert into a fixed-rate mortgage once the home is completed. This loan type is best for homeowners who want to save on closing costs and lock-in financing at a good rate.
Construction-Only loans are a short-term, variable-rate loan that is used to complete the construction of a home. Once construction is done, the loan must be paid off in full or refinanced into a mortgage. This loan type is a good option for applicants who have a lot of cash on hand from the sale of their previous home to pay off the construction loan.
Owner-Builder loans are available for homeowners who can demonstrate experience as a homebuilder or have the proper licensing. For those looking to ditch a third-party contractor and want to act as their own general contractor, these loans are for you.
Steps to Getting a Construction Loan
If you're thinking about financing a home remodel using a renovation construction loan, here's what that process would look like:
Step 1: Project Specifications
Loan requirements for construction loans can be a bit stricter than those for a traditional mortgage because there is no collateral yet. Typically the borrower will need to provide the bank with:
- Current Tax Returns and Financial Statements (i.e. debt-to-income ratio, credit score, etc.)
- Feasibility and Project Details: floorplans, interior and exterior rendering, city coding requirements, and preliminary selections and materials outline
- Construction Budget and Timeline — construction costs including land costs, equipment costs, and soft costs (i.e. legal fees, permits, insurance, etc.) and when they will be completed / paid.
- Management Capability and/or Constriction Partners to Complete the Construction
Step 2: Bank Proposal
Following a review of the project specifications, your bank will prepare a loan proposal suited to your needs through an underwriting process. The amortization schedule and interest rate will vary from project to project, but you may generally expect to see a fixed-rate five-year loan. If you are a business looking to finance construction for your commercial space, you may qualify for an SBA loan option instead.
Step 3: Acceptance and Appraisal
Part of the construction loan application process is an appraisal done by the bank. Because you, the borrower, have to pay for the appraisal of the construction site, it usually follows the bank's loan proposal. The bank can only loan based on the appraisal value of your project and it is critically important to finalizing the loan agreement. If the appraisal value comes in at or above the total project cost, you are good to move towards closing. If the appraisal value comes in below your total project cost, you'll need to revise your financing request or provide more equity to the bank.
Something to note is that there is an appraisal that occurs both before the construction project begins and after it has completed.
Step 4: Title Work and Closing
The final step to the renovation construction loan process is to put the title of the property in the first secured creditor's name, a.k.a. you. Once that is complete, you will close your loan, whether that be through refinancing or paying off in full.
No matter the project size, Flagship Bank can help you turn your house into a home. Talk with one of our experienced lenders today to find a financing solution best tailored to you.
