Remodel Contracting Podcast

Mortgage Magic: How Renovation Loans Can Help You Stop Hating Your Avocado Bathroom

• Jeff Bass • Episode 9

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What Is 203K Or Homestyle Renovation Loan- And How Can I Qualify?

Dreaming of transforming that fixer-upper into your dream home but worried about financing? This eye-opening episode breaks down the powerful financial tools that can make your renovation dreams affordable and potentially profitable.

Jeff Best, drawing from his unique expertise as both a general contractor and former mortgage banker, demystifies renovation financing options that most homeowners don't know exist. We explore the game-changing difference between FHA 203k loans and Fannie Mae HomeStyle renovation loans, revealing how these specialized mortgages allow you to borrow against your home's future value after improvements – potentially building substantial equity from day one.

For those with lower credit scores or smaller down payments, we detail how FHA 203k loans offer accessibility with minimum credit requirements around 620 and down payments as low as 3.5%. Meanwhile, homeowners with stronger financial profiles might prefer the flexibility of HomeStyle loans, which accommodate luxury upgrades like high-end finishes and swimming pools. Both options cover essentials like kitchen and bathroom remodels, roofing, HVAC, room additions, and more.

Beyond just explaining qualification requirements, Jeff shares crucial insider knowledge about the renovation loan process. You'll learn why finding the right contractor and lender experienced with these specific loans is essential, how the draw schedule affects your project timeline, and why budgeting for contingencies can save your renovation from disaster. His practical advice helps you avoid common pitfalls like underestimating approval times, miscommunicating with lenders, or attempting to live through major renovations.

Ready to transform that outdated kitchen or finally replace that avocado green bathroom? Call us at 469-831-5620 or visit Remodelcontracting.net for a free consultation. Your dream home might be more affordable than you think – and it could be the one you're already living in.

To learn more about Remodel Contracting visit:
https://www.RemodelContracting.net
Remodel Contracting
801 Alpha Rd, Ste 133
Richardson, TX 75081
469-831-5620

Speaker 1:

Welcome to the Remodel Contracting Podcast, where outdated spaces meet their modern makeover destiny. Hosted by Jeff Bass, general contractor, home renovation expert and guy who firmly believes your avocado green bathroom has gotta go. Based in the DFW Metro, remodel Contracting is here to help you level up your living space Because, hey, you updated your wardrobe, now it's time to update your home. Expect more, live better. Let's remodel.

Speaker 2:

How can you turn fixer-uppers into dream homes with less financial headache? Jeff Best explains the basics of renovation financing and who these loans are for. Welcome back everyone. I'm Sofia Yvette, co-host and producer, back in the studio today with general contractor and home renovation expert, jeff Best. Jeff, how are you today? It's so great to have you back.

Speaker 3:

Good to see you, Sofia. Very happy to be here today.

Speaker 2:

Amazing. I am so glad we're getting into this today. Financing can feel overwhelming, but these options might be a game changer for folks ready to renovate. So, jeff, what is a 203k loan or homeestyle renovation loan, and how can I qualify?

Speaker 3:

Awesome, great question. Sophia, and you know, anytime you get into the mortgage or the loan process it can be a little daunting and it's not the easiest thing to understand, but there are options available to you. So homestyle, homestyle renovation loan and 203k loan are similar, the differences being a 203k loan is backed by fha, that's federal housing administration. It's designed for people who want to buy or refinance a home and make renovations all rolled into the same loan. Okay, a home style loan is very similar, but it's backed by Fannie Mae, which is a conventional loan. So the main difference, being a 203k is FHA and a home style is conventional. Now, both loans allow you to borrow on the future value of the home after the repairs are done, and that's a game changer if you're buying a house that needs work or trying to unlock equity in a property that you already own.

Speaker 3:

Key differences are a 203k loan being FHA is more lenient on credit, but it is more restrictive on the types of repairs you can do. And an FHA loan, because it's a smaller down payment, also requires mortgage insurance, which is an insurance that protects the lender against default. That's different than your homeowner's insurance. A homestyle loan or the conventional renovation loan requires a higher credit score and a larger down payment. Renovation loan requires a higher credit score and a larger down payment, but it's often more flexible, especially for upgrades like luxury finishes or pools and things like that. Just to put it simply an FHA loan is better for lower credit or a smaller down payment. The conventional home style is ideal if your credit and income are strong and you want more freedom with the renovation scope.

Speaker 2:

Okay Now, what types of projects do these loans cover and what's off limits?

Speaker 3:

That's great. Well, you know, it covers quite a bit. It covers more than it doesn't cover. So Homestyle both the 203ks and Homestyle loans cover kitchen and bathroom remodels. They cover roofing, hvac, plumbing, foundation works. It's also, you know, things that are utility of the house too right, the bones of the house.

Speaker 3:

You can also get covered. You can do a room addition, energy efficient upgrades and, depending on the loan type and this is more for the Homestyle than the FHA and depending on the loan type, and this is more for the home style than the FHA but you could also include on the home style side, landscaping, appliances and then, depending on the loan on either of them, you may even be able to include accessibility improvements, whether those are for ADA compliance or whether those are for aging in place. But do keep in mind DIY projects. Diy work is not allowed. These loans require a general contractor and for any specific trades would be required to be licensed and, in addition, they're under a lot of scrutiny, right. So you would have to have a detailed scope of work and estimates as a part of the loan process.

Speaker 2:

Now, how does the loan process coordinate with the contractor's timeline and estimates?

Speaker 3:

So well. First, you need to hire your contractor early, because the lender will require a detailed bid and timeline as a part of the loan process. And so this is where it can get kind of tricky, because if it's a house that you're purchasing which, in my experience, most of them are part of the purchase process, so I'll lean a little bit more on that for the information here. So the lender collects your bank statements, your W-2s, all that good stuff for the approval of the loan. They're also just like that. They're going to collect the scope of work and the estimate from your contractor. So your contractor is going to have skin in the game before you even get approved on your home purchase.

Speaker 3:

So you've got to find the right contractor who has the ability to take on the risk of that capital, because there's time and money involved in preparing those things. You may need to. Even, depending on your contractor and depending on your lender, you may even need to get an architect or engineer involved in writing up the plans. That's going to really depend on your lender and your contractor, on how well they're communicating and how good your contractor is at conveying the scope of work that is to be done. But keep in mind. The biggest benefit here is that your loan is based on your after repair value, so the home must make sense as an investment, even with the repairs included. But the homeowner can really come out ahead here If you get $1.50, $2 out of every dollar you're putting into it. That's built-in equity from day one, so it's quite a good program.

Speaker 2:

Wow, Now are there specific pitfalls or delays people should watch out for.

Speaker 3:

Well, you need to be prepared going in and this is where you need to find a lender that understands the both. Whether it's two or three K or homestead. Your lender needs to understand those loans so you don't get too far down the road with the lender before you find out. You don't even qualify Right. So typically you're going to need to find out. You know, for a 203k, fha is going to require at least a 620 credit score, but they only require as little as three and a half percent down For a homestyle loan. Typically and this is going to depend on the lender but typically a homestyle conventional loan is going to require at least a 680 credit score and you're going to require at least 5% down and in most cases it's going to be a lot more than that, especially on the conventional side. As far as required down payment. But remember, we're going to be working with as completed value. So if you get $1.52 in value out of every dollar of the improvements, then that could help to give you more equity in addition to your down payment, which could help them help the loan process be a little faster. So, for example, let's say we have a project done and you're going to. The appraiser says hey, you're going to put a hundred thousand into this property, but it's going to increase the value of the property by 125,000. Well, that $25,000 now is theoretically just like a down payment, so it could reduce your cash required at closing as well. Again, these are all going to be very specific with your lender, and your lender and your contractor both have to be very familiar with doing these types of loans, and you want to find that out upfront before you get started. Like Me, for example, prior to being a contractor, I was a mortgage banker for over a decade, so this is something I'm familiar with. On both sides of the coin, not every contractor is going to be familiar with them and it's up to them to be honest with you and let you know whether it's something that they can do or not, as well as the lender. And I'll tell you I think we talked a little bit about common mistakes to avoid. So don't assume any contractor can handle a renovation loan. Don't assume any lender can handle a renovation loan.

Speaker 3:

Don't underestimate the time that it takes to get approvals and draw schedules. So that's another thing. Also, your contractor is going to have to be able to pretty much he's going to be capital funding your project as it goes along, because putting in the draw schedules, you're going to have time involved from doing the work to putting in the draw request, then receiving the draw request, so your project doesn't go in spurts work, wait, work, wait, work. It's going to be better if your contractor can afford basically to capital fund your project as you go along and then he's getting reimbursed as a project goes along. That's going to help it to go faster.

Speaker 3:

So don't underestimate the time it takes to get approvals, don't underestimate the time it takes to get the draw schedules and, of course, always budget for contingencies 10, 15% for contingencies. Make sure you have good communication with your, make sure your contractor has good communication with your lender, because your lender is going to be coming out and inspecting the project as well. They're not just going to keep paying you and taking your word for it that the work's being done. And, of course, if you are doing a project in your own home, just like any major project, don't expect to live in the home during a full renovation, especially if it's a 203k, because they're usually pretty intensive projects. So just to wrap up a 203k or home-style loan can be a very powerful tool for turning a not perfect home into a perfect fit, but it takes the right people and it takes a little patience. If you are considering one of these, talk to a lender early, get a contractor involved and be ready for a more intrusive hands-on experience than a traditional mortgage.

Speaker 2:

Wow, thank you so much for breaking that down for us today, jeff. We'll see you next time on Remodel Contracting Podcast, helping DFW dream big and build smart. Catch you next time, jeff.

Speaker 3:

Thank you, Sophia.

Speaker 1:

That's a wrap for this episode of remodel contracting podcast. Ready to kick that 90s kitchen to the curb? For a free in-home consultation, call 469-831-5620 or visit remodelcontractingnet. Expect more, because your home deserves better and, honestly, so do you.