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Ask Eli: Top Ways To Finance Home Renovation Costs

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This regularly-scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Rosslyn resident. Please submit your questions to him via email for response in future columns. Enjoy!

Question: If I purchase an as-is home to renovate myself, what are the best financing options available to me?

Answer: This is Part 2 of the question I answered last week about buying a home as-is. I asked one of the area’s top lenders, Troy Toureau of McLean Mortgage to provide a detailed response. Troy is a fantastic resource for any of your mortgage questions/needs. The following is his response:

If you want to own a home in Arlington or other areas surrounding the city, there is a lot of competition. The good news is that there are older homes requiring updates that many home buyers ignore, while newer, higher-priced properties often attract multiple offers.

Focusing on the renovation-ready market can expand your choices and perhaps give you access to a better location. The process of renovating can also give you a home that is more custom-tailored to your tastes and needs.

Financing a home that you will renovate is a bit more complex than a standard purchase loan. The good news is that there are several options that will help you achieve your goals of upgrading and/or customizing the house for your needs:

Construction Loans

If your renovations are projected to cost over $100,000, you can opt for a construction-permanent loan, based on the value of the home after the renovations are completed. Here is an example:

  • Purchase Price: $450,000
  • Renovation Budget: $150,000

In this case, your total needs are $600,000 and you can obtain a loan of up to 95% of that amount. You will receive the money at closing for the purchase, and then the remainder of the money in draws paid directly to the construction company as the work is completed. When the work is done, you do not have to finance the home again, as this “one-time-close” construction loan will automatically convert to a permanent loan. Larger down payments will be needed for larger loan amounts. Note that there are additional costs associated with construction loans because the appraisal is more complex and there are costs for periodic inspections and draws.

As an additional option, you can opt for a traditional construction loan and refinance into a permanent loan after the work is complete. While this will result in more costs by adding a refinance transaction, you will have more choices for permanent financing on the back end.

Other Financing Options

For renovations under $100,000, there are two good strategies:

  • If you are planning to put 20% or more down on a $600,000 loan, you can simply reduce your down payment to 10%, or even 5%, conserving your cash for the renovations. Here is an example:
    • $600,000 Purchase Price with 20% Down: $120,000
    • $600,000 Purchase Price with 5% Down: $30,000
    • Available funds for renovations: $90,000
    • In addition, the renovations may give you a higher appraised value to help eliminate the mortgage insurance costs associated with lower down payments.
  • If you do not have the cash assets for a large down payment, you can close on the property and then obtain a second mortgage or home equity line-of-credit (HELOC) after closing. To do this, you’ll need to find a bank that will lend the money based upon the renovated value of the house.

In today’s real estate market, especially in high-demand areas, it pays to explore all of your options. If you would like to discuss some of these options when you are considering purchasing a new home and/or renovating an existing home, feel free to contact me at [email protected] or (301) 440-4261.

Troy Toureau, Vice President of Production, NMLS #5618
www.AnyHomeLoans.com | 11325 Random Hills Road, Suite 400, Fairfax, VA 22030
McLean Mortgage Corporation | NMLS #99665 (www.nmlsconsumeraccess.org) Equal Housing Lender

If you’d like a question answered in my weekly column, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at http://www.RealtyDCMetro.com.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, (202) 518-8781.

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