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Release Date:
April 3, 2023

When is a Renovation Loan Right for Homebuyers?

Adam Levitt, Renovation Business Development Manager

Depending on your situation and overall vision for your home, the renovation loan you will need may vary. Our Homeownership Insights™ podcast explores the different homebuyer paths with renovation loan expert, Adam Levitt.

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HIP Renovation Loans With Adam Levitt

Introduction: Welcome to the Homeownership Insights Podcast, your leading mortgage podcast, sponsored by Fairway Independent Mortgage Corporation. Listen as experts from across the country share knowledge to help homebuyers and homeowners make the best decisions in their homeownership journey. Our next podcast begins right now.

Casey Morris: Welcome back to the Homeownership Insights podcast. I'm Casey Morris, and today I'm talking with Adam Levitt, who is the business development manager of Fairway’s Renovation Department.

And we are going to be talking about a really exciting topic, which is renovation loans, which are such a wonderful resource for homebuyers. And I think that not enough people know about them so, Adam, thank you for being here. I'm really excited to talk about this topic with you.

Adam Levitt: Yeah, thanks for having me.

Casey Morris: Great. So, to start with, can you define what a renovation loan is and what is so advantageous about it?

Adam Levitt: A lot of people have myths or misconceptions about, you know, the word renovation and what it entails. But a renovation loan is basically [for] either a buyer or an existing homeowner because you can use it to purchase a home or a refinance. But all you're going to do is take those costs for your project and roll them into the mortgage. And that way you don't have to worry about coming out of pocket with cash, especially if you don't have the funds for the project.

You don't have to worry about using your credit cards or anything like that because odds are, the interest rate on a mortgage is going to be a lot lower than credit cards and things like that.

So, it's really a fantastic way to be able to just really increase the pool of properties that you can look at using this renovation loan for minor cosmetic nonstructural improvements, or maybe there's foundation issues, or maybe you want to add on the second story, but it really runs the gantlet between, you know, minor to major.

Casey Morris: And I think the great thing about these loans is that because it is just one loan, you don't have to worry, like you said, about getting a high interest credit card and using that to finance the renovations or possibly waiting years to do it. Because you've already, you've just taken out this huge loan to buy a house and then maybe it's more difficult to get another loan, a personal loan or something like that to do renovations. So, it really gives you all of these possibilities upfront with one loan. And, you know, if you are a first-time homebuyer or you qualify for different programs, you may be able to get a loan with zero down or a relatively low down payment, which is pretty huge to be able to buy a house and renovate that way.

Adam Levitt: I'm glad you brought the point up of, you know, like down payments and stuff like that because, you know, again, you might hear me kind of talk about myths, misconceptions a lot, but the down payments for these loans mirror just the regular loans. If you take the renovation out of it, you're just buying a home without a renovation loan. So, the way that I like to look at it is if you're buying a home and you're only putting down 3%, that's 3% of not only the price that you're actually buying the home for, but all of that renovation budget that you're putting into it.

So, you know, if you think about $50,000 and you don't have a pot of gold and a big lump of sum of $50,000, 3% of $50,000 is 1500. So you're really getting an extra $50,000 to go ahead, an upgrade, repair, remodel, whatever it is. And it's costly. And you only have to you're only bringing in 3% of that. So it's just, again, just a fantastic way to have somebody, especially with low inventory these days. But how many people find that home that's it's in that neighborhood that they were just trying to get into? It's by family and friends. It's close to work. It's got the yard, whatever it may be, but it just is not turnkey and it just needs some new life breathed into it. And now all of a sudden you don't need to worry about having that cash because you can finance it as a part of your mortgage. And then again, to answer your question about it's just one loan. A lot of people really have these things that while the property is undergoing the renovation, I must be doing something crazy with my mortgage payment. And then when the project is done, it kind of transfers into something else. And that's absolutely not true. As soon as the loan closes, before the shovel hits the dirt, you're making your regular mortgage payment. So maybe you can have a 30 year fixed or a 15 year fixed just like a traditional loan. Your payment will never change over that 30 years, or if you're 15 years unless you sell or if you refinance. So, you know a lot of simple things that just kind of get misconstrued because it's just a little bit different.

Casey Morris: Yeah. Yeah, that's a great point, that it's not as complex as it may sound. It's just the one mortgage, the one payment every month. And but it's for the purchase and for the renovations. So that's pretty huge. And can you talk a little bit about the different programs that are available? I know that there's conventional renovation loans, USDA, VA, FHA, obviously, you know, there's too many details to go into, too much depth. But if you could just talk a little bit about, you know, what they allow and the down payment requirements for those.

Adam Levitt: I'll just kind of start off with the zero downs. The USDA has obviously been an area that that that's a USDA loan, but it's a traditional true zero down loan. We're not only are we talking about the amount that you're buying it for, but you're talking about the amount of that construction budget as well. So you put that together and it's zero down and you move forward with any kind of types of repairs. So that loan will allow you to do minor cosmetic. So if you're walking into the house and maybe the kitchen or the bathrooms could use a little bit of love, that would be perfect for it. If you're doing something major and removing walls around and stuff, that'll work as well. So that's really not as popular just because it has to really be in a specific area. But what is really popular are VA renovation loans. These loans are terrific because just like the USDA, they're zero down. So on buying the home for X and I have let's just say $35,000 worth of minor cosmetic work. I put that together and I don't have to bring any cash in because it's true, 100% financing with the entire combined amount. Those loans are terrific in regards to conventional loans. If you're a first time homebuyer, you're down payments only 3%. And again, based on the combination of what I'm buying it for, plus that construction budget, there's FHA loans where the down payments are going to be three and a half percent. And again, based on the combination of the two, the difference between some of the loans are basically kind of the property types. And we get this question a lot and this is really what I want. I want people to know if you're buying a home and it's going to be your primary residence you're going to live in, then you can use any of those loans that we talked about. The USDA, VA, obviously if you're an eligible veteran, conventional or FHA, but what happens if you're an investor and you want to pick up a home that could use a little bit of love and rent it out? The FHA loans don't let you do it. The USDA VA don't. But conventional loans, you actually can. Lot of misconceptions out there because there's people that think, well, with a two or three K loan, which is the FHA loan, you can't do that. And that's true. But the conventional loans that you can and then in addition to that, there's folks that want to buy a true second home or a vacation home and they want to fix it up at home by the lake or in the mountains or in the desert. And it could use a little bit of love. That's perfect for a conventional loan. And those loans all allow you to do certain things, like putting in that brand new outdoor oasis in-ground pool with a really cool gazebo. And of course, you need to have an outdoor kitchen. Those are all considered luxury items that the conventional loans allow. That's some of the FHA loans don't. But the down payments and this is probably the most important thing for anybody listening is just to literally take those two numbers and put them together. So I'm buying a home for X. My construction budget is why I put those together and that's what we're going to use, just like you're buying the home standing there today. And if it benefits an existing property, then all we do is say this is the amount that you might currently on your mortgage. And then we go ahead and take the construction budget and add up those numbers as well. So that is truly the place to start.

Casey Morris: Great. And I think it's worth noting for homebuyer or prospective home buyers who are listening, that not all mortgage lenders offer all of this full spectrum of renovation loan options, but fairway does so conventional FHA, USDA, VA, Fairway will do those loans, you know, those renovation loans. So that's just a great thing for people to know that if that's going to interest you, you can reach out to Fairway and find out more about what you qualify for and what your options might be there.

Adam Levitt: One of the really great things about it is our staff is all highly trained, all the way from, you know, the processing of a loan and making sure that you have really qualified, educated people that that understand what they're looking at. All of our loan officers have to be certified. So when a buyer or an existing homeowner is talking to a Fairway loan originator, it's not somebody who's thinking, well, oh, boy, I just kind of try to kind of figure it out on the fly. These are all people that have taken training classes, and it's actually kind of, you know, it's not like it's just a15 minute course that you got to take. We really take pride in making sure that we're giving the best information that we can to buyers and existing homeowners, because buying a house, you know, can be a little stressful. Buying a house and then remodeling it or renovating it might add a different level. So we really want to make everybody feel not only comfortable but confident in what they're doing.

Casey Morris: The big question that, of course, everyone is going to be wondering is when you take out a renovation loan, how much can you actually borrow? So can you talk about how that calculation works?

Adam Levitt: So the good thing is, I like to tell some folks you stripped the renovation out of it and just ask yourself, okay, I'm getting a regular FHA loan or I'm getting a regular VA loan or I'm getting a regular conventional loan. Renovation loans mimic those same, you know, guidelines, MALONEY Limits and stuff like that. So, yeah, you know, I like to see that when a potential buyer comes to one of our Fairway loan officers, you know, and we're trying to figure out exactly how much money they can afford. We don't know if they're going to find a condo, a townhome manufactured home, a turnkey home, a multi-unit, or maybe a home that needs a renovation loan. So when we give them that golden ticket with the number that they can afford, you know, if you could afford a 300,000 our house and it's a turnkey home, great. Or to use your example, if you find a home for 225,000 and you've been pre-approved for 300, then that technically means that, yeah, you can use the difference of $75,000 to go ahead and upgrade that property and stuff like that. So but the number one question that people always want to know, is it like, how do I know how much I can afford it.

Casey Morris: Right now.

Adam Levitt: When I go when I walk into this house? So Casey is my loan officer. She told me that I could afford a $400,000 house. And I walk into this house that clearly could use a little bit of love. It could use life breathed into it, you know, whatever. And it's listed for 300,000. Okay. Well, from my perspective as a homeowner, I know I can afford it because Casey gave me a golden ticket for four and it's only three. But how much can I afford? Well, it's simple math, right? If you can afford a 400,000, our house and the house that you're walking into is listed for three. Then technically, you got $100,000 you can use to go ahead and upgrade, repair, update, breathe new life into it. All of that is way more important than knowing all the things that you can do. It's really, really, really a cool thing to have because again, it just it just really opens up the pool of properties that you could consider because the condition of the property doesn't matter. And that's actually one thing that it just kind of, you know, was a reminder when the loan closes. That's the work starts afterward. And again, a big myth. The misconception is, well, what's going to happen? You know, I don't want to do all this work. And when there's a loan closed and all that. My kind of mantra is the loan closes and the work doesn't. The work starts afterward. So, you know, it's just really simple. The sale of the property goes ahead and closes the loan and they get their proceeds and they walk away. The real estate agents go ahead and get their commission and everything. Now the new buyer takes the property in their ownership and then they start everything.

Casey Morris: Yeah. That's a that's a really good point because, you know, sometimes you might hear the phrase renovation loan and assume all of this work has to be done before it can close. And it's going to be really complicated. But the fact that nothing's going to start until you actually close on the loan so you don't have to worry about getting sort of caught up in the paperwork for six months before you actually own the home. It's like you buy it and then the work begins. So it's in that way as well, simpler than people may think that it's going to be.

Adam Levitt: Yeah, absolutely. And, you know, we you know, we're really serious in terms of not just saying, well, you know, you can put in a brand new pool or you're looking at a property that is really old and it's got foundation issues or, you know, maybe the house is perfectly fine, but it's outdated. We really try to educate and make folks aware, especially if it's a real estate agent, too, because, you know, a lot of buyers are really putting all their stock and trust in that agent to help navigate them through the process in addition to the Fairway originator. So, you know, we go ahead and from the numbers perspective, let a buyer know what they can afford and then, you know, they're on their way looking at homes. And, you know, if you're a buyer and you're looking at a home with an agent, you can see that there's stuff that you want to fix and you're educated and you're aware of how the numbers work and what you can do. It just really empowers you and just, you know, it just kind of takes you to a different level as a buyer because a buyer who understands not only how the numbers work, but the things that they could do makes them more powerful and knowing that they could transform the property.

Casey Morris: Absolutely. And I a point that I've heard you make before, which I think is so powerful for people to understand, is that especially in competitive markets, which sometimes it feels like everywhere is a competitive market these days, this is a huge game changer because it means that houses that you couldn't look at before because you didn't think that you had the money for the renovations or it was just too daunting. Now you have the opportunity to say, okay, yeah, let's go look at the fixer upper. Let's look at the house that needs a little bit of work. Like you said, it might be in a perfect neighborhood, but you would have passed it by before. Now, when you're thinking about a renovation loan, you can say, Yeah, okay, let's go look at some of these houses, houses that other people are overlooking for the same reasons that you were. And so now maybe you're able to negotiate, maybe you're able to get a better deal or find a property that could be amazing and worth a lot more after you put the money in. That just wasn't even on your radar. So I think that that that's just a huge thing to consider.

Adam Levitt: I'm going to give you a number here because I'm a big numbers guy and it's only because you said the word negotiate 70% of the loans that we did. And this was this was in 2021. But 70% of the loans that we did, the end appraised value ended up being higher than the amount of what they bought the place for and the construction budget put together. And because of this, if you could think of a house that might be kind of aging on the market, the listing has just been there and there and there. Maybe, you know, it's not being marketed correctly. For whatever reason, the listing price gets lowered and the list price gets lowered. And then, you know, most people coming in from that perspective can see that. And if there's a really motivated seller, they're going to want to kind of trade that property. So those houses a lot of times end up being purchased at less than market value. And then all of a sudden you come in and you breathe new life into that property, and then it goes back up to that market value, if not even a little bit more. So can you picture I mean, I know 70% might not really be that great in school, but if you're hitting 70% of your shots in basketball, if you're batting 700 or anything like that, that's that's a percentage that I would like. And you can imagine that these homeowners, a lot of times aren't even really realizing it, but after they buy the property and breathe new life into it and they end up with that resulting equity in their. And they get to customize it and they get to live where they want to live. I mean, you just put it all together. It just ends up being a fabulous opportunity that just again, more people just need to kind of listen and it's a little bit different. And is there a little bit more work? Of course there's a contractor there, you know, and stuff like that. But for those folks that really go down that path and there are thousands of these loans that are done every year, this is not like, well, we're doing two or three of these and we're not doing thousands. We're doing hundreds. I think last year we did about 650 of them, and we're one of the biggest lenders in the renovation space. But overall, thousands of these loans that are being done, so it's out there. More people just need to kind of be aware about it.

Casey Morris: Yeah, absolutely. And can you talk a little bit about that flip side of that? It is a little bit more work and just what the process looks like in terms of, okay, you found the property, but what do you need to actually qualify in terms of submitting plans or contractor bids and things like that?

Adam Levitt: A little bit more work if you just compare it to there's a turnkey home that's all done. I bring my toothbrush in my pillow and I move in. I don't have to worry about anything. But for that home where there's going to be a project, it doesn't matter if it's minor cosmetic. Does it matter if it's, you know, an addition for a second story or whatever? But the buyer is going to hire a contractor, a licensed contractor, some states who don't need a license. And the reason I say that is because Fairway and every lender is going to go by the rules of the city and county or the state where the property is in. But there will be a contractor, that contractor and that buyer will get together and figure out exactly what they want, the scope of work to be, and they'll break down the scope of work. Just really simple. I'm painting, I'm doing some drywall, I'm putting in some lighting fixtures, whatever it may be. And they break down the cost of it and say, Here's the material cost and here's the labor cost, and they add it up. And that is what is presented to us. So that when we order to the appraisal and this is really the best part of everything, we are going to give the appraised value. We're going to we call it subject to completion, but we're going to look in the appraiser is going to tell us what the appraised value of that home is going to be thinking that the project's already done and the shovel hasn't even hit the dirt yet. And we're going to use that completed value today when we determine exactly how much money that the buyer can borrow. So I don't know where else you can look into your crystal ball and say, okay, I'm a buyer or I'm an existing homeowner, and I go to my contractor and we decide what we're going to do and everything's all broken down. And then I go to my Fairway loan officer and we get the appraisal done and they give me the future value, which is also called, and I base my loan amount off of that, even though the shovel hasn't even hit the ground yet.

Casey Morris: It's a definitely a unique situation. And then what happens after the loan closes? So the work starts after that. But in terms of what that means for the buyer, can they move into the home? How long do they have to make sure that the renovations are done? How does that work?

Adam Levitt: Each program might be just a little bit different depending on the work that you're doing. So I would say on average, you have six months to get the project done. And again, a huge question probably number one is with COVID and you know, just people not being able to go look at homes like inspectors and material delays and stuff like that. That's a tough question. And, you know, we just want to look at the project and say, okay, you know, you got to the point where we're supposed to be done and you're not. Show us your plan and maybe a little timeline on how you're going to get there when you're finished. But it's a pretty simple process because that scope of work that we got from the buyer and the contractor at the beginning, we literally are just going to go down it. And when they get to the end and they're all finished with it, we do an inspection to verify that the whole project is 100% complete. A lot of times the city and county has gone out there and given the bar were like their stamp of approval or, you know, an occupancy permit or whatever sort of documentation from them. Because again, everyone's different. That basically just kind of says you're good, you're done, you know, you're okay with us. And at that point, the best part is nothing changes with the mortgage payment because they've been making the payment already. So there's really nothing different other than to be really honest with you. The buyer having a housewarming party and enjoying it with all their family and friends. And so their family and friends can come see and be jealous.

Casey Morris: There's something, you know, particularly special about finally moving into a house and knowing that you really were able to customize it and make it exactly what you wanted. You know, you don't have to spend years kind of daydreaming. Oh, you know, someday we'll get to do this or get to do that. It's like you get to do it right up front and just enjoy your home that much more.

Adam Levitt: When I'm when I'm speaking in front of groups of people and, you know, I've built a house, I remodel the house. So, you know, I've been through the process. It's just personal.

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