Where do first-time homebuyers who sink all their cash into a down payment for a fixer-upper find the money to make needed repairs? In the past, banks have offered renovation loans, which combine a mortgage with additional money to make home improvements — the value of the loan being based on what the house would appraise for after repairs are made. But these loans have become harder to find and qualify for at a time when home prices have yet to stabilize. “The presumed market value of a property is a falling sand castle right now,” explained Keith Gumbinger, a mortgage analyst with financial publisher HSH Associates.
Nevertheless, there are other ways besides maxing out a credit card to finance home improvements, beginning with the Federal Housing Administration’s version of a renovation loan. The 203(k) streamline is available through FHA-approved lenders, and because it’s federally insured, banks are more willing to offer the loan. Borrowers with good credit can finance up to $35,000 into a mortgage to update a single-family home or condominium that serves as a primary residence. The renovation money is then repaid over the life of the mortgage. Rates are typically about an eighth of a percentage point higher than for a standard FHA mortgage, said Tom Corzine, a marketing and development manager for renovation lending at Wells Fargo.
The repairs must be made within four months of receiving the money and may include projects like a new roof or a remodeled kitchen or bath. The money can’t be used for luxury items like a hot tub or for significant structural changes that would require tearing down walls. For the latter, FHA offers a full 203(k) loan, which caps the combined mortgage and renovation amount at 110 percent of the home’s improved value and allows structural repairs to be completed in six months. The lender usually works closely with the contractor and borrower to ensure that repairs stay on schedule and on budget.
Banks are not the only institutions lending money for home repairs. Peer-to-peer lenders like Prosper and Lending Club tap individuals to make unsecured loans to borrowers online. Lending Club, for instance, will lend up to $25,000 and charges interest rates averaging about 13 percent, though they can be as low as 8 percent. To be eligible, borrowers must have at least three years of credit history with no bankruptcies or defaults and a “debt-to-income ratio that is less than 25 percent, excluding a mortgage,” said Renaud Laplanche, Lending Club’s chief executive officer. Loans are repaid in monthly payments over three years.
Borrowing the money from Mom and Dad could be a winning move for everybody. Reston-based financial planner Patti Houlihan sets up an amortization schedule for the adult children who borrow from her clients. “Mom and Dad can charge you some reasonable interest rate, like 3 percent, that is less than what you’d pay for a bank loan and more than they would get in a money market,” she said.
What about borrowing the money from a 401(k)? Don’t risk it, Houlihan says. Borrowers younger than 59 1/2 who lose their jobs will need to repay the full amount within 60 days or owe taxes and penalties on the funds they’ve withdrawn.
