AL and FL Mortgage News

Cash Out Refinance for Renovations?

August 27th, 2015 2:03 PM by Devin Murray

Looking to take cash-out of your home for renovations? Don't just yet.  I got a call a few hours ago that prompted this post and I figured I'd share.

There is an important distinction that the average consumer is unaware of and that is this....there are cash-out loans and then there are renovation loans.  Here is a grossly oversimplified summary. 

Cash-out Loans: On a primary residence, FHA allows you to take up to 85% of your home's equity for cash-out while conventional limits are capped at 80%.  Most lenders today require a minimum 620 score for either FHA or Conventional cash-out scenarios.  The key is the value of your home is determined by the market in its "as is" condition with an appraisal.  If you have a 65% or less equity position, this may be a better option.


Renovation Loans: If you are doing home renovations/repairs of say $15k+ and don't have actual cash in your hand (or want to use your cash for other purposes), your loan may be better structured as a renovation loan versus a cash-out loan.  The single biggest difference with a renovation loan is that you can get 95% of the future value of your home going conventional and 96.5% of the FUTURE VALUE going FHA with a 640 minimum score.  Future value is often referred to ARV or After Repair Value.

Future Value: Being able to use the value after improvements DOES NOT mean that you get 15% more equity going Conventional and 16.5% more going FHA.  It is better. In fact these percentages will actually be HIGHER for both when making "good", value enhancing improvements (another topic, another day).  In this case the value of your home is determined by the market in its condition as if the improvements were already completed today.  

As we have proven with our customers in markets from Miami, Florida to Huntsville, Alabama the capabilities of using future value and higher LTV limits means everything.  In some cases this means adding a dream kitchen, new hardwoods, new landscaping, or fresh paint.  In other cases we have seen rooms added, swimming pools built, and outdoor kitchens in spaces. It could mean making crucial improvements that help an owner capture top dollar before selling.  The possibilities for homeowners and renovation loans are literally endless.

If you have ever watched #PropertyBrothers #LoveItOrListIt #FixerUpper or other similar shows and wondered how all their customers (owners and buyers alike) are able to come up with $30,000 to $120,000 for their epic improvements?  Based watching scores of episodes myself and doing the math, it is clear that the overwhelming majority of owners and buyers in these shows are using renovation loans to create these budgets and not their own cash. 

So buyers can use the power of future value too?  Yes.  With the right contractors and designers, you can imitate exactly what these people are doing even if you don't own the property.  In terms of qualifying, the terms or very similar to purchasing a home outright using conventional and FHA financing.

Give us a call 888-269-8335 or email us at service@gulfstatesfinancial.com about your scenario if you want to know more about how this works.  

 








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