Construction Home Loans

Remodel means to change the structure or form. Rehab means to restore, repair

Contractors provide draw schedule, inspections are done, and money is then dispersed. The exception is 203k Limited and HomeStyle. The 203k Limited does allow for full payment to contractor up-front. The homestyle can do an up-front reimbursement to contractor for 50% of material.

VA Remodel

HBFS Home Fixer

$5,000.  Up to $10k with exceptions.

FHA home loans can be used to purchase or refinance. They can also be used to remodel or rehab a loan.

FHA 203k Limited

Is this the same as streamlined?

The contractor can get paid 50% of the project up-front.  (i.e. doesn’t need to wait for inspections and draw schedule).  That’s 50% of the project, not the material.  203k Limited goes up to $30k, doesn’t require a FHA consultant, and doesn’t have the draw requests. It’s easier on the contractor and the rehab process.  Underwriting is the same as a normal 203k.

VA Renovation

This can’t be structural in nature, only cosmetic improvements. There’s a $30k(ish) cap for the actual renovation work. VA’s actual cap is $35k but that includes fees and a contingency reserve.

The VA renovation product does not allow for up-front payments to contractors. Instead, contractors will be paid based on a draw schedule that they provide. After each draw there is an inspection done by a third-party Inspector to ensure the work was fully completed. This keeps contractors on pace and on budget.

Inspection fees are $200 per draw. The contractor determines the number of draws. There can be up to 3 draws: the first at 20% completion, the second draw at 60% completion, and the last draw at 100% completion. The inspection fee(s) will be rolled into the loan amount.

There is also a 10% to 15% contingency that needs to be accounted for in the $35,000 VA cap limits. The contingency will be 10% if the utilities are on and functional; otherwise it’s 15%. For example, let’s assume a there’s a project with $30k in construction costs, the utilities are on and working, and the contractor will need three draws. This means there will be a $3,000 (10%) added to the loan amount for the contingency.

HomeStyle

The only mortgage loan program that does an up-front reimbursement to contractor for 50% of material.

New Construction Loan

The two methods to financing the building of a new home are the “one-time close” and the “two-time close.” The two-time close is more traditional than the one-time close.

Two-Time Close

The “traditional” route involves acquiring an interim construction loan to construct the home and then refinancing that loan into a permanent mortgage once the construction is completed.

Interim Construction Loan

One-Time Close

Home Improvement 2nds

Home Improvement & Construction

When it comes to home improvement loans CMG Financial is ranked #1 in the country in volume for first-lien renovation loans. Gloating aside, when a loan amount venture into the jumbo realm (i.e. goes above $700,000) it’s often times makes more sense for them to do something with a local bank. This Financial Advisers Mortgage Cheat Sheet has more below.

Note: the LTV for home improvement loans and construction loans will be based off the ARV (After Repair Value). Banks calculate their ARV differently so we’re not going to list them on this Financial Advisers Mortgage Cheat Sheet.

Home Improvement

The After Repair Value (ARV) should be considered initially when doing a home improvement to ensure the house isn’t accidentally over improved for the area. To pay for a home improvement the homeowner can pay cash (obviously), get some type of A6 equity loan, or get a home improvement loan. The A6 option can be challenging if they don’t have enough equity in their current home.

There are two primary options for doing home improvement loans: 1) do one single first lien (which could mean refinancing their existing mortgage), and 2) keep their current mortgage in place and go get Home Improvement Second Lien. A primary consideration on which direction depends greatly on what their existing mortgage terms are. If they have a killer rate then we’ll most likely recommend a second lien.  It’s a matter of calculating the blended rate, factoring costs, and discussing objectives to determine what’s best.

Construction Loans

Construction loans are two one of two ways, either with a single closing or as two separate loans.  Costs are about the same for both and most of the time when the loan amount is above $424,100 (i.e. conforming limits) we’ll recommend the two-time close and recommend the client to a local bank for interim construction financing.  The reason is because it gives the client more options to shop the rate when it comes time for the permanent loan as opposed to being beholden to the One Time Close lender.

One Time Close (OTC)

A borrower can do a single transaction where the interim construction loan and the permanent financing take place upfront with a single closing.  This is call a One Time Close (OTC). There is major marketing behind One Time Close (OTC) program and I’m typically not a fan. My preference is to go to local bank and get interim loan then refinance with a “normal” mortgage lender for the permanent once the home is built.

• OTC Advantages: rate is locked up front but typically an ARM (7/1 or 10/1) but can be a fixed (rarely a 30 year) and the rate has a small premium.  Cool part is no qualifying for permanent when construction done (i.e. no more paperwork) so if they lose their job the permanent is already in place (though vast majority of folks doing this loan are pretty secure in their employment)
• OTC Disadvantages: rate is subjected to whatever rate the lender wants to give you for your long-term permanent loan.  If borrower doesn’t already own the lot (and not buying from builder then seller must wait longtime for closing because building plans, spec, and budget must be ready before appraisal ordered.