Four Steps to Securing a Renovation Construction Loan

A renovation construction loan is a financial product that allows homeowners to finance both the purchase and renovation of a property within a single loan. These loans simplify the process by combining costs into one manageable monthly payment. As a leading Minnesota Bank, Security Bank & Trust Co. provides tailored solutions for homeowners looking to improve their properties.

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. 

Benefits of Renovation Construction Loans

1. Convenience: Combine home purchase and renovation into one loan.

2. Flexible Terms: Tailored repayment schedules to fit your financial situation.

3. Increased Property Value: Enhances home value through strategic improvements.

4. Customizable Projects: Funds can be used for a variety of home upgrades.

5. Competitive Interest Rates: Security Bank & Trust Co. offers competitive rates compared to other Minnesota Banks.

6. Expert Guidance: Our loan officers provide expert advice and support throughout the process.

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. If you are acting as your own general contractor, this loan option is the option for your renovation loan. 

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, we have plenty of options to tailor those loans as well. 

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 ensure that there is title insurance for the lender and that you as homeowner are properly in title as owner of the property. 

Key Considerations Before Applying

• Budget Planning: Creating an accurate budget is crucial. Start by obtaining quotes from multiple contractors and adding a contingency of 15-20% for unexpected expenses. 

• Eligibility Requirements: Lenders assess factors such as credit score, income stability, and debt-to-income ratio.

• Loan Terms: Consider whether a fixed or adjustable interest rate is suitable for your financial situation. Understand repayment options and potential penalties. Our Loan Options Page offers a breakdown of available terms.

• Contingency Fund: Unforeseen costs are common in renovation projects. It’s advisable to set aside extra funds to cover unexpected repairs or code compliance issues. The Minnesota Housing Finance Agency provides useful resources to help homeowners prepare.

• Documentation Requirements: Be ready to provide proof of income, tax returns, renovation plans, and contractor agreements. Having these documents prepared can expedite the loan approval process.

Frequently Asked Questions (FAQ)

1. What credit score is needed for a renovation loan? Most lenders have a minimum credit score. Contact us today to learn more.

2. Can I use a renovation loan for investment properties? Yes, certain loan products allow financing for investment properties.

3. How long does the approval process take? Typically, it takes 30-45 days to secure approval.

4. Can I refinance my renovation loan later? Yes, refinancing options are available after project completion.

Why Choose Security Bank & Trust Co.?

As a trusted Minnesota Bank, Security Bank & Trust Co. offers personalized service and local expertise to help you finance your home renovation project with confidence. Our team understands the local market and works with you to achieve your renovation goals efficiently.