Home Tips Pro Blog

If you enjoy working around the home and doing various DIY projects, then maybe you're ready for the Holy Grail of DIY - a home improvement project through a home renovation loan. By repairing and renovating your home, you will build instant equity into your property, whether you are completing a minor home renovation or a full-scale home rehab.

When taking on a home renovation loan for your rehab project, you will oversee the general contractors and their sub-contractors. For the true DIY enthusiasts, you may even decide to do some of the work yourself to save some money and build some extra sweat equity into your property. If you do go this route, just make sure your home renovation loan will allow for it.

For many DIY lovers, a home improvement project is a chance to put their skills to good use. When you fix up your home through a home renovation loan, you can make a wide range of repairs, from minor cosmetic changes to full, structural tear-downs. There are many examples of homeowners who do much of the labor themselves, from framing all the way through to landscaping, depending on the scope of the home renovation project.

However, most home renovation loans will require you to contract out the bulk of the labor and focus on doing only the minor repairs that don't require licensed work, such as painting or landscaping. Every bit of labor that you do yourself, though, becomes extra sweat equity that you build into your home. And, right now, there is no better way than a home renovation loan to build instant equity into a property in today's market.

Once the house is built, it's worth whatever a potential buyer is willing to pay for it. Therefore, cutting the costs of a home improvement project by doing some of the work yourself means your new home will be worth much more than you spend to rehab it.

But, don't worry if you feel you're not ready (or willing) to take on an entire project on your own. The key to success is more about project management than it is about actual physical labor.

Even without doing any of the labor yourself, there is plenty of instant equity to be made through a home improvement project (i.e., a home renovation loan). When you consider the number of homes on the market, especially the vast number of foreclosures, then you can see that there are some amazing bargains to be purchased - most of them simply need some repair work to maximize the property's value.

So, if you feel you have the management skills to oversee the project, then taking on a home improvement project may be right for you. To squeeze as much equity as possible out of the project, you will want a home renovation loan that has low costs and competitive rates.

Beyond having to understand the planning and project management involved in construction, a successful homeowner also understands the financing that is needed. It's fair to claim that most people who rehab a home do not have the cash on hand to complete the project without financing some (or all) of the construction.

With the current belt-tightening by the mortgage industry, home renovation loans are getting harder to find, even if you are a well-qualified borrower. The good news, though, is that there are programs still available - you just need to understand some of the key points about the financing that may affect your ability to fix up your dream home.

First, it's important to realize that the costs of the financing a home improvement project will typically be slightly higher than the costs of a simple home purchase loan. Step back and look at the big picture. The extra costs for a home renovation loan are there to offset the costs of administering the draws during the rehab and updating the title work throughout the renovation process. But, isn't the extra equity you're going to build into the value of the home worth it? It should be.

Home renovation loans are a specialty product that represent more work to the lender. On the other hand, they also represent a greater opportunity for you, the borrower, to save a ton of money. It should be a fair trade all around.

The second important thing to realize is that home renovation loans will typically have stricter requirements than a simple purchase or refinance loan. These requirements may mean you have to qualify based on stricter credit score guidelines or tougher debt-to-income ratios.

A good exception to that rule is the FHA 203k home renovation loan. This is a government insured home improvement financing product that has very flexible borrower qualification requirements. The credit score requirement is set as low as 620. The down payment is as low as 3.5%. There are no reserve requirements.

So, what's the drawback for the FHA 203k home renovation loan? There are only two. First, not many lenders are qualified to provide them. So, you should work with a lender who specializes in home renovation loans and the FHA 203k program. Second, there is an additional fee of 1.75% that comes in the form of an Up-Front mortgage Insurance Premium (UFMIP). Fortunately, though, you can wrap this fee into the financing of your home improvement project, so it isn't an out-of-pocket expense. As long as you're building lots of equity into your new home, the additional 1.75% should not make a big difference to you if it means getting the financing you need to renovate the property.

The third important point to recognize about home renovation loans in general is that they will always be designed to protect you and ensure there is enough money available to complete the project. Nobody, meaning neither the bank nor you, wants an unfinished home. So, it is pretty common for home improvement loans to require that you qualify for extra amounts of money in your rehab line of credit on top of your strict budget numbers.

For instance, you may have a small pot of money wrapped into your loan as a contingency fund in case you slightly under-budgeted. It's a protective feature to make sure you don't run out of money during the rehab and end up with a home without a roof. However, have no fear - whatever you don't use from this contingency fund will simply be applied to paying down the principal of your loan, which means more equity for you.

So, if you are a fan of DIY projects, and you think you have the management skills to oversee the project, then perhaps a home renovation loan is right for you. The large amounts of savings can make it a very profitable experience. Just make sure you understand the planning and the financing involved.