The 411 on Renovation Loans with Movement Mortgage's Duke Walker

While most buyers want a turnkey new home, many have dreams of finding and updating that fixer upper (thanks, HGTV) or, more commonly, can’t find that “perfect” property in their market due to limited inventory and/or budget.

Fortunately, if you don’t have the extra cash to put into updates (which is not uncommon with real estate prices in the DC area), there are financing options that let you tackle everything from a basic kitchen or bathroom update to more extensive renovations. To shed some light on these, I caught up with Duke Walker of Movement Mortgage, a native Washingtonian and current Capitol Hill resident who has helped hundreds of families in the region with their mortgage needs.

 Walker

Walker

With limited inventory in the DC area, are you seeing more buyers considering and purchasing homes that they want to make renovations to right away? What mortgage options are there for those that may not be in a position to self-fund those?

Yes, there has been an increase in buyers looking at homes that are in-between “shell/unfinanceable” and “turnkey/brand new.” At Movement Mortgage, we offer and specialize in many renovation loans, which allow people to finance the purchase of the property in additional to the construction work needed to update the house to their specifications.

Can you briefly explain the different types of renovation loans and who they work best for?

There are renovation loans offered by FHA (203k), Fannie Mae/Conventional (HomeStyle) and the VA (Veterans Affairs).

There are two types of FHA loan, 203k Standard and 203k Limited. Both loans require only 3.5% down payment. Standard covers many “major” repairs, such as structural repairs, moving or altering a load-bearing wall, or even knocking the house down to rebuild it as long as you leave part of the existing foundation intact. 203k Limited covers a max of $35,000 toward repairs. This loan type is intended for less intensive changes or updates such as roof repair, replacement of HVAC systems, flooring or minor remodeling work.

The conventional reno loan is called HomeStyle. It has a minimum of 5% down but no minimum renovation cost required. HomeStyle also has an option for investors. It can be used on a single unit property with all renovation work allowed, including luxury additions, and a minimum down payment of 15%.

Download a chart comparing the various renovation products, courtesy of Movement Mortgage.

What are the major differences in the process between a “standard” mortgage and a renovation product?

The primary difference is that a renovation loan requires a bid from a licensed contractor detailing the work to be done on the home. That bid has to be completed prior to an appraisal on the property. An appraiser will inspect and review the house in its current condition, as well as review the bid from the contractor in order to come up with what’s referred to as the “after improved value.” Often times, waiting on the bid can push the timeline out 7-10 days further than the “standard” mortgage approval process.

 Click the image to download.

Click the image to download.

Can anyone do the reno? Could the borrower or a family member complete the renovation?

The work has to be done by a licensed contractor and that person cannot be the buyer or a family member of the buyer.

Are there any frequent misconceptions buyers (or agents) have about renovation loans?

The typical misconception has to do with the length of the process. It does not have to take forever. Most of our renovation loans go to close in 30-45 days, sometimes sooner. If the contractor is on board and motivated to do their part, there’s no reason it should take more than a month to close.

How can current homeowners take advantage of these options, whether they are planning to sell or not?

These renovation products can not only be used in a purchase transaction but also in a refinance. For example, if you wanted to put $30,000 into a kitchen remodel but don’t have the equity position for a HELOC (home equity line of credit) or extra cash lying around, you could roll that cost into a mortgage and build equity!

Is there any final advice you have for buyers, in general, looking to purchase in the coming year?

Don’t be afraid to get your hands dirty with a property. Some of the best deals out there are livable homes that just need a little bit of love. And don’t be afraid to talk with a mortgage lender such as myself. We don’t judge people. Our job is to guide and consult you from beginning to end of the home buying process. It never hurts to see where you stand financially and what possible loan products might be available to you.

Thank you to Duke for sharing his experience and knowledge, and feel free to connect with him on Facebook, Instagram and Twitter, or reach out to him for your specific questions and needs.

What to Know When You Are Selling & Buying: Q&A with Greg Kingsbury

In the Washington, DC area, it's not uncommon for homeowners to climb the property ladder, gaining equity over time and upgrading to a home that better fits their longer-term needs (instead of buying that forever home from the start).

  Kingsbury

Kingsbury

Some owners will hold onto their first property as an investment but many will want or need to sell it to move onto their next house. In a less competitive market, having a contingency around the sale of a home is not uncommon but, in this region, it can make getting your offer accepted more challenging. However, there are options...and we tapped into the expertise of local lender Greg Kingsbury, who leads the Kingsbury Mortgage Team at Caliber Home Loans, to answer some of the most common questions when looking to sell and buy in short order:
 
What is the #1 question or concern homeowners come to you with when they are looking to sell their current home and buy a new home?

Of course all situations are different so many prospective borrowers will have different questions based on their individual scenarios. If I had to narrow it down to a single question, it would be how to qualify for a home prior to selling their current home. Most of the time this is based upon wanting to declutter and make minor improvements to their home so it looks best and will command the most value on the sale.

The advice that seems to get thrown around the most is to just go get a bridge loan. I find that most clients are told to go get one, but don’t really know what a bridge loan actually it is.  Many think it is some kind of magical loan that just gives you your equity to allow you to buy something new. The truth I find is that most people won’t qualify for a bridge loan. When getting a bridge loan, you have to qualify carrying your current mortgage, the new mortgage and a payment on the bridge loan. There usually also are substantial costs to the bridge loan, generally in the form of a few points paid on the amount (in addition to closing and recording costs). The other common misconception is that you can get a bridge loan for all of your equity.  Most providers of bridge loans don’t want to exceed 80% of the value of the residence you are departing inclusive of any outstanding debt.  

So, what options are available to sellers who are looking to qualify for and finance their new home purchase? 

There are several options to consider when trying to qualify to move up and buy a new home. There is the bridge loa, but often times, as noted above, that doesn’t work or isn’t cost effective.

There is a lot of misinformation out there, so do yourself a favor and talk to someone that is local and, even better, someone that has been referred.
— Greg Kingbsury of Caliber Home Loans

The second option is doing a lower down payment with the intention of paying down that loan after closing with the proceeds of the sale after the departed residence sells. This is usually accomplished by a principal reduction followed by a loan recast. (A loan recast is when your loan servicer re-amortizes your loan after a large principal payment.) Usually the minimum required for a recast is $5,000. This allows you to get a lower payment without having to refinance your loan and allows you to keep your current interest rate. The recast just takes your new principal balance and adjusts the payments to still keep the original loan maturity date.

A third option is a combo loan. This is where you have a first and second mortgage with the intention of paying off the second mortgage after the sale of the departed residence leaving you with just the single first mortgage. 

Aside from working with a top-notch agent, what recommendations do you have for your clients who are looking to "move up"?

Do your homework upfront and budget accordingly. Make sure you get all the numbers and consider things on a worst-case scenario. You never know if the market is going to turn, and you have to hold onto a property longer than anticipated. Consider backup plans in the event you can’t sell. Find out what the rental market would command for your property. Would you be able to carry both payments if you had to hold onto it and rent? 

Are there any potential pitfalls when selling and buying as it relates to mortgages? If so, how can clients avoid or minimize the chance of these?

The only pitfall I can think of is not having everything reviewed up front to make sure you really qualify for what you are hoping to get into. You may have your credit pulled and someone take a quick look and think everything is ok but, if they aren’t asking questions about the total picture, you could all of a sudden not qualify. If the debt ratios are close and a bank is only looking at a credit report and not asking if there are additional items such as condo fees, taxes not included in the mortgage, child support/alimony, etc., it could look on paper like you’d fully qualify and once all the pieces are put together you end up not qualifying.

This can all be avoided by being upfront about everything and making sure that the lender you speak to has the full picture when they are reviewing your file. 

The DC area real estate market is competitive and buyers often need few or no contingencies to win with sellers. How do you work with a buyer’s agent to strengthen their offer?

We try to get as much information at the beginning to make sure that there are no concerns with their ability to get financing. If there is an option to waive contingencies, this definitely helps win offers. However, waiving contingencies can put borrowers in a difficult spot and prove to be very costly if something were to go wrong. But, with the right questions asked and the appropriate documents supplied and reviewed, these risks can be mitigated to protect the borrower while also allowing them to present the strongest offer possible. We’ve been able to help buyers with financing beat out all cash offers with these strategies. 

What is the best piece of advice you have have for prospective homebuyers today? 

Take some time to set up a call with a trusted loan officer before you go out looking at anything. You should be able to have a conversation about your individual situation and get a real understanding of your options. From there, ask for scenario sheets to show you perspective loan options.

There is a lot of misinformation out there, so do yourself a favor and talk to someone that is local and, even better, someone that has been referred. A random contact from the Internet has no vested interest if they steer you wrong or something goes wrong. They can just move on to the next online lead. A local person lives on the referral. They have a more vested interest to see you succeed as their livelihood depends on satisfying each customer to keep the referrals coming.

Thank you to Greg for sharing his experience and knowledge, and make sure to connect with the Kingsbury Team on Facebook and Twitter for more mortgage insights.