I will start by saying that I am no way a pro here. At all. But this was our experience with deciding to do a home renovation loan. Also, sorry, but this is long.
Once we saw the house and got good vibes, we decided it was time to look into our options for financing. Renovating was something we had always dreamed about, but we honestly had no clue how to go about it. We had done a lot of DIY projects in our current home, but we are definitely not highly skilled, or fast, nor do we have the time with our lifestyle. I grew up in a huge old house that are literally constantly under construction. The house was always in some form of “project” and covered in dust. I didn’t want to move a one-year-old into a construction zone, so our first step was to determine if there was some dream scenario that would allow us to stay in our current house while we hired awesome contractors to do a majority of the work for us…without paying for it in cash (I mean, we would love to but let’s be realistic).
I talked to a friend that works as a Mortgage Consultant for PA Preferred Mortgage . She spent so much time going over our options for financing and eased my mind about the process. Email me if you are interested in her contact information. She is truly fantastic! There are so many options, but she was able to help us narrow them down. Because we bought our current home with an FHA loan, a 203k mortgage wasn’t an option. We were excited to learn that a conventional home renovation loan existed, but didn’t require a 20% down payment like we initially thought (although you finance nerds know the downside to putting down less money is PMI…boo).
To outline the process (as I remember it):
- We decided that we loved the house.
- We had a contractor that we had worked with in the past come to the house to give us recommendations for work that needed to be done, as well as an estimate.
- We got preapproved for a renovation loan (mortgage) for the house that would cover what we wanted to offer as well as the renovations (more on that in the next post). We looked at our budget and decided what we could afford, including the mortgage on our current home.
- With the help of our fantastic agent, Jessica Baker of Achieve Realty (Pittsburghers, call her, she rocks), we submitted an offer and negotiated a final price. Our offer was accepted on Thanksgiving, happy turkey day to us.
- Then it was bombs away with the planning process, and all the fun of getting a mortgage closed when you are self employed, with the additional hoops of the renovation portion.
- Our contractor, Gorilla Construction, worked their butts off to get all of the detailed scope of work estimates and documents that the bank needed to get our loan approved and closed. Shout out to Dan and George for being so patient with us, and the team that did our closing with all of the extra steps.
- Luckily our inspection did not find anything overly scary, aside from the roof being a little bit older than we expected, and some wiring issues (hey there Pittsburgh knob and tube).
- After our inspection, there was a bank inspection and an appraisal of the house. Part of the deal with this type of loan is that the house (when completed) needs to appraise for as much, or more than the value of loan. This is smart, obviously, so you don’t take out a $350k loan, when your house will only sell for $200k. It is also slightly annoying (to me) because the finished product, even with the work that will be done taken into consideration, is theoretical and subjective depending on the appraiser. Our house came in about $4k under our total loan, so we had to scramble to come up with that cash at closing. Heyyy anxiety.
- Somehow, even with all the extra steps we managed to make it to our January 22nd closing date, and demo on the house started the next day.
A big part of this was that we wanted to stay in our current home while we renovated. Which means carrying two mortgages until our house sells. Luckily the neighborhood that in our current home is in is pretty hot, and our house should sell fairly quickly once we are ready. We also gained a ton of equity over the last 4ish years, which made the decision to take on a larger loan a little bit easier.
A few things come to mind that I have told multiple people to consider about doing a renovation loan this way.
- You will pay more fees due to all of the extra steps involved.
- You will have a longer closing because, well, there are a million hoops to jump through. Our team with PA Preferred/Prosperity Home Mortgage was extremely helpful and outlined everything thoroughly, but there is a ton of steps (and rightfully so).
- We had to pick anything and everything that was going into the renovations before the loan could even be approved, and it had to be submitted by the contractor with their estimate. Since we are doing a lot to the house, that meant all of the tile, kitchen, lighting, carpet for our basement, bathroom fixtures…everything. It is a lot. So fun, but a lot.
- The homeowner has to be OK with a 60ish day closing.
- The general contractor you work with will do everything you want to have included in the loan. George with Gorilla has a great team that is doing all of the work for us, so we feel confident in his ability to have great subcontractors to do all of the work. One general contractor for the whole job. And they have to be OK with the banks payment schedule. Essentially the contractor makes no profit until the job is done and inspected by the bank. They can make several “draws” from the loan, but not until after the work is already started. This is why it is essential to find a trustworthy, patient contractor.
So, this is about as far as we have gotten. Leave questions in the comments, or shoot me an email!
Real Estate Agent | Jessica Baker of Achieve Realty
Mortgage | PA Preferred Mortgage (Prosperity Home Mortgage)
Contractor | Gorilla Construction