A renovation loan is superior to other forms of loans because it will allow you to borrow money based on the projected value of your home after you have completed your proposed renovations. Therefore, you will be able to receive a higher loan because your property worth will increase with your improvements.
There are multiple ways in which a renovation loan differs from other types of loans. The primary difference is that most mortgage loans will offer you a financing arrangement that will allow you to borrow a fixed amount of money based on the price of your property. Some loan arrangements will even allow you to borrow money based on the current market value of your property.
How does this Type of Loan usually work?
A renovation loan often works similarly to other types of loan agreements. The process begins with a single loan, followed by a single closing payment at the time the loan is paid off in full. The lender will advance funds to the contractor that you hire for the renovations. The loan will be obtained in instalments as each stage of the work is completed.
Two Main types of Renovation Loans:
Purchase Renovation Loan
There are two common varieties of renovation loan. The first is known as a purchase renovation loan. This type of loan is ideal for clients who wish to begin the work after closing on the purchase of the property in question.
This loan can be provided for both the purchase of the property and the renovations that will immediately begin on it. A minimum down-payment for a purchase renovation loan is approximately 3 to 5 percent of the projected value of the home once the improvements have been made.
Refinance Renovation Loan
The second type of renovation loan is known as a refinance renovation loan. It is also often referred to as a rehab loan. This type of loan is very similar to a purchase renovation loan, with some slight, but important differences.
This loan is ideal for applicants who already own the property that they hope to increase the value of through renovating. Under the terms of this loan arrangement, any prior financing that exists on the property can be paid off while additional funds for the work are provided. In most cases, you are able to borrow up to 100 percent of the value of your home once the work has been completed, depending on the type of renovations your loan qualifies for.
Why Renovate Your Property?
There are a number of reasons to renovate a property, including:
- to improve its appearance or comfort (personal enjoyment for homeowner)
- to retain or increase its value.
- To increase the likelihood of selling
Renovation offers numerous opportunities to create a home that appropriately reflects your personal lifestyle and contributes to your comfort and enjoyment, whether you invest in energy-saving modifications, utility features, or even to gain a higher sustainable living objective.
Furthermore, applicants choose to renovate in order to make their property more attractive to sell. Based on the current market conditions, these renovations can greatly enhance the speed at which a property sells or even increase the price offers available.
What is the Approval Process and how does it work?
As mortgage brokers, lenders allow us to help you obtain a loan that provides for the purchase or refinance of your residence, plus additional funds for your renovations. Details are as follows:
- The applicant is responsible for providing detailed quotes for the project and clearly outlining the degree of the work to be completed as well as the cost.
- Clients must also obtain quotes from legitimate, reputable contractors, and stores for the planned work.
- Clients must ensure the quotes are thorough and detailed, with all intentions and materials attentively described.
- If your renovation requires a construction permit, clients must ensure that they are eligible for this permit
- As your mortgage brokers, we will use this information to support your financing request and summarize the work involved in our loan submission notes to the lender so that they are better able to understand and support your renovations.
- Once you have submitted a financing request, the lender will review your project and then determine how much the renovations will improve the value of your home.
The lender will review your work through one of these options:
- If your project is approved by an inspector, the lenders could approve a reimbursement of approximately 80% for a simple renovation quote (such as a kitchen project) without an upfront appraisal required.
- For more complex projects, the lender may require an upfront appraisal of the property to determine the current value in comparison to the value of your home post renovations based on your detailed quotes. The important difference is the improvement value of your home.
- Once a mortgage is reviewed for approval, the lender will advance the estimated value of the improvements of your home to your lawyer’s trust account. Your loan will remain there until your projected is completed, inspected, and the lender authorizes your lawyer release these funds to you. Multiple advances are available for larger projects, but usually there is only a single advance at the end of a project.
- An important expectation to note is that you must complete your improvements in a timely manner and beforeyou receive your reimbursement. This means that you will either have to cover the improvement costs yourself, or that the contractor and/or store will carry the costs until after completion and inspection.
- On average, approximately 60-90 days is allowed to complete the intended improvements.
- In addition to the improvement funds, the lender will also send your lawyer the approved mortgage amount required to purchase your home currently or to replace your current mortgage on the chance there is refinancing.