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Renovation Loans for Home Improvement – How They Work

Published on: February 7th, 2018 | Written by Jimmy Vercellino

If you want to make the move to a new home, you will first have to sell your existing property. You will naturally want to get as high an amount as possible from the sale of your home.

One of the best ways to add a significant amount to the resale value of your home is to take out a renovation loan.

How a Renovation Loan Differs from Other Types of Loans

There are several ways that this loan differs from other types of loans. The chief difference is that most mortgage loans will offer you a financing arrangement that will enable you to borrow a fixed amount of money that is based on the price you paid for the property. Some loan arrangements will go a bit further by allowing you to borrow money based on the actual current market value of your property.

A renovation loan is superior to these other forms of loans in that it will allow you to borrow money based on the projected value of your home after you have completed the proposed improvements. This naturally gives you a higher figure to borrow money based on.

How Does This Type of Loan Usually Work?

In most cases, a renovation loan works similarly to other types of loan arrangement. The process normally begins with a single loan, followed by a single closing at the time the loan is paid off in full. The lender will advance funds to the contractor that you hire for the work. The money will be delivered in installments as each stage of the work is completed.

Purchase Renovation Loan

There are two very common varieties of this loan. The first is known is a purchase renovation loan. This type of loan is perfect for people who wish to begin the work after closing on the purchase of the property in question.

The loan can be provided for both the purchase of the property and the work that will immediately begin on it. A minimum down payment will usually be about 3 to 5 percent of the projected value of the home once the improvements have been made.

Refinance Renovation Loan

The second major type of this loan is known as a refinance renovation loan. It can also be referred to in some cases as a rehab loan. This type of loan is very similar to the first one, with some slight differences.

This loan is the perfect type of loan arrangement for people who already own the property that they desire to renovate in order to increase the value of. Under the terms of this loan arrangement, any prior financing that exists on the property an be paid off while additional funds for the work are provided. Depending on what type of renovations you qualify for, you can borrow up to 100 percent of the value of your home once the work has been completed.

How Do You Apply for a Renovation Loan?

We can help you with that! There are many different agencies that you may apply to in order to receive a this type of loan. Fannie Mae and the FHA both offer excellent refinance renovation loan programs. Contact us for more details.

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