Financing a Fixer-Upper

Last weekend I was at a neighborhood summer party and had a chance to catch up with one of my neighbors, a real estate agent whom I’ve known for years. We talked about real estate (of course) and what’s happening in our small town. We both understood how this year is turning out to the most competitive real estate market in years. The inventory of houses for sale is at historic lows. There are more buyers than homes for sale which is driving up prices. She explained it’s not unusual for sellers with a home priced at market value to have an offer within days of being listed.

I live in northern New Jersey where there are a lot of older homes. Many have not been updated in decades or worse have neglected maintenance. It’s getting more difficult for buyers to find an older home that has been updated with modern features and state of the art amenities all at an affordable price.

However, for buyers with vision and a plan there are unique home buying opportunities in this challenging market.  Fixer-upper homes in good neighborhoods are being purchased in “as is condition” and renovated by buyers who know what they want to do and how to get it. Or, instead of selling their current home and trading up, some home owners have decided to renovate & revitalize their old home into a newer 21st century smart home. Thank you HGTV for the inspiration!

Financing a Fixer-Upper with a Construction-to-Permanent Mortgage

For buyers who want to build, renovate or create their 21st century smart home a construction-to-permanent mortgage loan may be the way to go. This loan finances both the construction phase and the permanent mortgage with just one closing and with one competitive fixed rate. Interest-only payments are made on the outstanding balance during the construction phase. Making interest-only payments during the construction phase gives the home owner a break from the full loan amount, as they pay just the interest on the amount that accrues during the construction phase.

General contractors like construction-to-permanent mortgages too. They do not have to finance the project. The loan is made to the home owner and disbursements are made to the general contractor to cover their expenses, material costs, pay workers and subcontractors.

Another benefit is a home owner can obtain financing at a much more favorable rates and terms on their home construction than a general contractor who is typically relying on a business line of credit to fund construction. The home owner can also lock in a rate before construction starts which can be big advantage if rates are expected to go up during the construction phase.

Construction-to-permanent loans also offer another very important advantage – the simplicity and savings of one loan closing. When the project is complete, the loan automatically converts to a permanent fixed-rate loan with principal and interest payment, just like a traditional mortgage.

Qualifying for a Construction-to-Permanent Mortgage Loan

The requirements to qualify for a construction-to-permanent mortgage are similar to a traditional mortgage. The loan amounts are determined by assessing the loan-to-value ratio, considering the acquisition cost (purchase of land plus cost of completing the project) or the appraised value of the property after construction is completed. Other requirements include Debt-to-Income ratios, credit rating and liquid assets for reserves and closing costs. However in some cases the closing costs and the reserves can be included in the construction-to-permanent mortgage effectively making 100% financing an option.

A construction contract, construction cost breakdown and a set of plans and specifications will be needed to apply for a construction-to-permanent mortgage. The bank’s appraiser will need these documents to determine the value of the home after the construction is complete.

Buying a fixer-upper provides many rewards and personal satisfaction, but it can be challenging and complex. I’ll provide value and expert advice on financing the construction. The home owner can focus and enjoy their project with peace of mind knowing the construction loan and permanent mortgage have been approved, the rate has been set for both and details of funding each stage of construction, from start to finish have been worked out ahead of time.

ABOUT: Arthur Aranda, NMLS #1042093 is a home construction loan specialist who has worked in the mortgage business in various roles and capacities since 1986. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars.  For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.