Everyone that is considering a major home remodeling project is first concerned with how much it will cost and then how they will pay for it. Financing a home renovation project can get as complicated as the actual remodeling project. Depending on the type of loan you are applying for will dictate the required documents that will be necessary. There are some sequential loan processing procedures that must be followed carefully to avoid application denials or complications in the underwriting process. Determining the amount of funds that will be required is the first step in the process. The larger the project size the greater the amount of funds required, the more likely a complete set of construction documents will be essential.
It is critical to understand that if you are planning on financing your remodeling project that you not commence any improvements until you get the lenders approval. Allowing any kind of home improvements can hinder your chances of approval because of the possibility of mechanic lien rights having a priority position. We will examine the optional financial instruments and qualification factors associated with selecting the best loan for your needs.
Feasibility Study
Determining the viability of a major home remodeling financing project is an essential part of the early development process. The best place to commence the viability of a home remodel project is with a feasibility study on your housing options. When an owner is considering a home renovation project they should financially compare the available buy / remodel options. These include the buying of a new home compared to remodeling or adding an addition to your existing home..
To determine the expected value of your existing home requires adding the expected home remodeling cost to the amount owed on the existing mortgage. This provides you an all in expected value amount. You would then compare that value to what the comparable home values are in the immediate neighborhood. This is essentially comparing what the total investment of your home would be to a comparable home that you could purchase of equal improvements and value. This comparison study is a sanity test to determine the financial wisdom of your home remodeling investment.
Construction Documents
In most cases in Houston, Texas you will be required to submit your home remodeling plans to your local architectural review committee. This usually requires an updated site survey and construction plans to be submitted to them for approval. The second benefit of these documents are that many lenders require the construction documents and a general contractors estimate as supportive submittals to the loan application process. The lender will want some assurance that the you have a licensed professional capable of undertaking your improvements.
Construction documents are an important part of maintaining quality control and assuring that an owner’s architectural and lifestyle needs are met. Without these documents construction details and standards are likely to be riddled with errors and mistakes. Essentially a good set of construction plans pays for itself in efficiency and avoiding rework.
Financial Loan Criteria
The financial loan criteria that lenders use to qualify loans are a) disposable income, b) proposed improvement cost, c) credit score, d) loan to value ratio. These factors also contribute to your loan qualification and the prevailing interest rate.
- Income Factors – Your personal disposable income is the most determining factor in your ability to afford a home improvement loan. You must prove you can pay the monthly payment. The lenders will also consider other sources of income as potential resources.
- Credit Scores & Debt Structure – The credit scores will also play a determining factor in both the interest rate you are offered and your general qualification. Your history of debt payments and the amount of total debt also contribute to the lenders decision. Lenders like a score of 680+ to create confidence in lending to owners.
- Loan to Value Ratio – During the underwriting process the lender will also evaluate the loan to value ratio. This ratio is the difference of the loan amount as a percentage of the estimated completed market value of your property. The typical standards are a qualifying loan of 75% – 80% of the completed home value.
- Interest Rates – The interest rate depends on all the other factors we have mentioned and if the loan will be a personal guaranteed or will be secured by collateral. If the loan is secured by the property, it will also depend if it has a first or second lien position. This can result in a rate of anywhere between 4%- 8% interest rate.
Loan Options
There are many loan options available for most major home remodeling projects. Choosing the best loan to fit your needs depends on qualifying for the lenders loan criteria and your goals for structuring the loan. What length of term you will need, if you are using the home as collateral and your long term structuring goals.
- Personal Loans – Personal loans are loans made with your personal guarantee as security. These are issued on an owners strength of credit and are flexible in the terms of repayment.
- Federal Loan Programs – Represent programs like the VA and FHA home loan programs. These are social government programs to assist special qualifying homeowners in obtaining low cost loans. The home will be required as security on the loan.
- Home Equity Loans – Home equity loans are the most common home loan available to owners with equity in the property. The loans are principally based upon the loan to value ratio of the home after the completion of remodeling. These instruments use the equity of the home as collateral to secure the loan. The interest rate will be higher on the second mortgage and the maturity terms are shorter.
- Mortgage Loans – The mortgage becomes an advantage as a home remodeling loan option when the owner can finance the home improvements through cash or other methods of finance that does not tie up the lien rights of the property. The mortgage is the most cost effective long term strategy of financing home remodeling.
- Credit Cards – Credit cards can also be an effective short term strategy for paying home remodeling cost. This strategy is effective if you have a zero interest rate or can defer the actual cost until you put your permanent loan into place.
Financing home remodeling is an important aspect of successfully completing your home improvements without interruption.
