Potential home-buyers in California have an issue. They want to buy, they're actively home shopping, but they are spinning their wheels, a day late or a dollar short on every offer for their dream home.
Housing inventory in California is ridiculously tight, there's a clear lack of quality units available with inventory levels below three months in many markets. Southern California (LA, Orange County and San Diego counties) is feeling even more of a pinch, with two months or less in popular neighborhoods.
To put it in perspective, an "normal" housing inventory level is six months of supply.
With a lack of quality homes available some potential home-buyers have given up, while others have stay doggedly persistent in their home search only to continue to come up short. Some California buyers have taken another route though, they've decided to get creative and, instead of an endless search for their dream home, they've decided to determine their own destiny.
They are not waiting around for the needle to glimmer from the haystack, they are burning the haystack down. They are creating their dream home. How are they doing it? By educating themselves on some mortgage financing tools that many don't know exist, renovation loans.
Renovation mortgages allow potential buyers to purchase and renovate in one loan, with one closing. They expand the pool of potential properties in a few ways.
First, they open doors to properties that typically might not be eligible for a loan at all due to deferred maintenance issues. So the foreclosure or short sale that been neglected for years and desperately craves some TLC, with a seller unable or unwilling to improve or repair the issues, is now an option because renovation mortgages allow for required repairs to be addressed after you close instead of before like traditional financing
Second, renovation loans allow you to update with your personal touches. Dated housing stock that would not typically be attractive is now in play. Since the renovations and improvements are financed, and not out-of-pocket, buyers can focus on what they like about a property (school district, neighborhood, spectacular view, man-cave) and simply change what they don't.
House too small? No problem, add a new master suite, second story or attached garage. Want a pool? No problem, just add one and throw in a hot tub (time machine not included) while you're at it. Want an open floor plan? No problem, tear down some walls, raise a ceiling, add some windows or french doors, whatever meets your fancy.
Like Baskin Robbins, renovation loans come in a lot of flavors if you find the right renovation lender. If you find the wrong one you get may end up with no renovation options at all or simply the straight vanilla, the 203k streamline. Many first-time buyers, as well as buyers looking to re-enter the home-ownership arena after a bankruptcy, foreclosure or short sale, will go FHA 203k.
The 203k loan is the easiest to qualify for with the smallest down payment at 3.5%. Let's check a sample scenario so we all clear on the numbers.
You found a home, the purchase price is $300,000, but to turn it into your dream home will require about $100,000 in renovations. $300,000 + $100,000 = $400,000 which is your "acquisition cost". You'd then take your 3.5% down payment from the acquisition cost of $400,000 leaving you with a base loan amount of $386,000 after the $14,000 down payment.
Seems too good to be true right? You can purchase a $300,000 home and do a $100,000 renovation with only $14,000 down? It's not to good to be true, it's a fact and it's how thousands of buyers are maximizing their home purchase investment.
You might be thinking, I don't want an FHA loan. They are too expensive, the mortgage insurance is too high and I prefer to put 20% down to avoid that MI expense. The Fannie Mae HomeStyle is your choice then. With traditional conforming guidelines, down payments as low as 5% for a primary residence and expanded occupancy to investors and vacation homes, the HomeStyle is the most versatile of the renovation mortgage products.
Some buyers, however, need to borrow more than FHA or Fannie Mae allow as their loan limits. The higher end buyer needs to look toward a jumbo renovation product.
Jumbo renovation typically allows for $1.5M as the max loan amount and requires a 20% down payment. Well qualified buyers are using jumbo renovation products to pick up distressed properties and creating a lot of instant equity in the process.
Generally, if you're qualified for a mortgage your qualified for a renovation mortgage too. The credit guidelines are virtually he same. If you have a vision of what your dream home would be, then chances are you can create if you want.
If you're deciding whether to move or improve then you are not out in the cold, all the renovation mortgages discussed above allow you to refinance and use the after repair value instead of current value too!