If you are considering a home renovation loan to finance your new home improvement project, then you need to go into the process as prepared as possible. These twenty tips will prove invaluable when shopping for and navigating through your home renovation loan.
1. Home Renovation Loan Don’t:
Don’t rush through your planning phase in an effort to get to the actual renovation as quickly as possible. Many an owner before you has made this mistake only to run out of money with a half-improved home.
2. Home Renovation Loan Do:
Do understand that the planning and financing phase is just as important as the actual rehab phase. The battle can be won or lost before the first nail is ever hammered.
3. Home Renovation Loan Don’t:
Don’t rely on a cost estimator to put together your home improvement budget. They will not be accurate enough.
4. Home Renovation Loan Do:
Do take the time you need to put a solid budget together, based on actual bids and quotes from local contractors and material providers. Make sure you based these bids and quotes on your actual blueprints.
5. Home Renovation Loan Don’t:
Don’t shop for a home improvement loan based solely on the interest rate during the rehab. Short term, interest-only rehab rates will only create a minor variation to your overall costs, because they only apply for the few months that you will be renovating.
6. Home Renovation Loan Do:
Do make sure your loan accrues interest based only on what you actually borrow during renovation. This way you can pad your budget going into the rehab without having to pay interest on it.
7. Home Renovation Loan Don’t:
Don’t allow the seller of the house to force you into a purchase agreement that expires in one month. Your lot contract will expire before your loan closes and funds.
8. Home Renovation Loan Do:
Do explain to the seller of the house that you are wrapping the purchase into your home improvement loan and need at least two months (or more) on the contract in order to finalize plans, complete a full budget and get the file through underwriting.
9. Home Renovation Loan Don’t:
Don’t try to build the biggest house in the neighborhood. Your loan’s appraisal will most likely be inadequate to get the file through underwriting, because there won’t be any comparable properties in your neighborhood.
10. Home Renovation Loan Do:
Do understand the appraisal process and requirements before you finalize your house plans and/or select your property. If you can’t get a solid appraisal, you can’t get a home improvement loan.
11. Home Renovation Loan Don’t:
Don’t settle for a loan that has two closings – one for renovation and one for the modification to the permanent loan once you’re done building. This extra closing will cost you time, money, and headaches.
12. Home Renovation Loan Do:
Do find a loan that has a single closing to cover the land purchase, renovation phase, and conversion to permanent financing. You may see the term single-close or one-time-closing.
13. Home Renovation Loan Don’t:
Don’t try to secure financing with poor credit nowadays. It is hard to find any financing for poor credit borrowers right now, especially if you want to rehab a home.
14. Home Renovation Loan Do:
Do make sure your credit score is at least above 620 with a few open, healthy accounts. For your best chances at financing, get your score above 700. Talk to your loan officer for credit restoration ideas if needed.
15. Home Renovation Loan Don’t:
Don’t start building your new home without a plan for selling your current home.
16. Home Renovation Loan Do:
Do consider listing your current home for sale right from the start. Your new home may not be ready for another six months, but that gives you plenty of time to consider offers and prepare for the sale of the current home.
17. Home Renovation Loan Don’t:
Don’t start renovations until your loan has closed. Depending on the state and/or county in which you live, you may run into issues with title insurance. No title insurance means no financing.
18. Home Renovation Loan Do:
Do speak to your loan officer and local title companies if you absolutely have to begin improvements prior to the loan closing date.
19. Home Renovation Loan Don’t:
Don’t hurt your credit score while you fix up your own house by running up credit cards or missing payments due to being strapped for cash.
20. Home Renovation Loan Do:
Do look for a loan that has features to keep your cash in your pocket: minimal down payment requirements, an interest reserve feature to limit mortgage payments while you build, a contingency to protect you from under-budgeting, etc. These types of features will prevent you from spending all of your own cash, which leads people to severely damage their credit scores while they build.