Four Reasons Why You’ve Never Heard of Renovation Loans
Paperwork and lack of information are some of the biggest reasons why most people have never used, let alone ever heard of renovation loans to finance home remodels - until RenoFi.Apr 15, 2021 • Justin Goldman
If you’re looking to pay for a major home remodel, a renovation loan probably isn’t your first thought for financing. Very few homeowners use renovation loans, or have even heard of them.
Before RenoFi, all these renovation loan options required you to buy or refinance a property in need of repairs and combine the funding needed to purchase (or refinance) your home with funding to pay for renovations, all into one loan.
The great thing about renovation loans is that your borrowing power is based on the value of your home after the renovations are completed, which generally means it’s increased exponentially.
There are FOUR reasons why these loans are still relatively unknown.
(And why we created RenoFi Loans, home equity loans with that added borrowing power, as a unique renovation loan alternative.)
Any loan you take on will require a certain amount of paperwork, but renovation loans require more. In many cases, and especially with FHA 203k loans, every detail of your renovation plan needs to be thoroughly documented and explained and sometimes submitted to a HUD or other renovation loan consultant - and inspected by said consultant. While this is a good thing, because it means you’re fully prepared to take on the loan, it can be time-consuming.
You’ll need another form for every single draw and inspection.
No, you don’t get your full loan amount up front. You’ll take out your money from an escrow account with your lender in several draws over the duration of the project. Before receiving the money from each draw, a consultant will be required to come and inspect the construction progress and make sure it aligns with the detailed renovation plans. This all means more paperwork. (Note that the exact requirements vary by loan type and lender. Some lenders may not require a HUD consultant for Fannie Mae Homestyle and Freddie Mac ChoiceRenovation loans).
How RenoFi Loans are Different: With RenoFi Loans, you get your money upfront. We’ve streamlined your paperwork requirements and our advisors make the process simple. You don’t need to use a draw and inspection schedule. Before applying for a loan, you will have to submit your renovation plans, contract, and contractor’s info - however once you do this, you’re ready to apply. When you close on the loan, you’ll get all the money right away.
No mountains of paperwork, and no waiting for inspections to get funds.
You’re Forced To Refinance, or Delay Your Home Purchase
Traditional renovation loans are first mortgages - which comes with pros and cons.
If you’re refinancing a home you already own, you’ll have to pay closing costs again to refinance as well as potentially lose a low interest rate you’ve already locked in.
If you’re planning on paying for a new house with a renovation loan, that’s going to delay your offer and could even prevent you from getting the house that you want.
Before you put in an offer on your dream home, you’ll have to have renovation plans and an estimate from a contractor. In a competitive housing market, that will really slow you down.
How RenoFi Loans are Different: RenoFi Loans are not first mortgages - they’re home equity loans that don’t touch your first mortgage. That means that if you’re purchasing a home, you can go through the normal home buying process and use a traditional mortgage product.
Then, after you purchase your home, you can apply for a RenoFi Loan, and this won’t slow you down and potentially get in the way of the bidding process.
Or, if you’re looking to improve your current home, you don’t need to lose that low interest rate you’ve locked in on your current mortgage.
They’re Hard To Find
Like we mentioned above, most banks and credit unions offer home equity loan and HELOC options, as well as cash-out refinancing. It’s quite easy to shop around the different lenders in your area for the best rates and terms, and find a home equity loan that works for you, and all loan officers will be highly familiar about the intricacies of the loan option and processes.
Very few loan officers are knowledgable about renovation loans.
The same cannot be said for renovation loans - the majority of lenders in the U.S. do not offer renovation loans. In the rare ones that do, most loan officers there probably aren’t as well versed in the process of FHA 203k or Fannie Mae Homestyle renovation loans because they aren’t as common.
Because very few people, homeowners and lenders alike, are knowledgeable about these types of loans, it can be difficult to learn about them and apply, despite all of their major benefits.
How RenoFi Loans are Different: While some traditional renovation loans have been around for decades, RenoFi Loans are new - created in 2018 - which is why many homeowners don’t know about them yet.
But unlike traditional renovation loans, rather than go straight to a bank, you’ll work with dedicated RenoFi Advisors to prepare to apply for a RenoFi Loan and get matched with the perfect lender. All of our credit union partners are familiar with RenoFi Loans and the typical process.
This saves you the hassle of scouring the internet to find the limited lenders that offer renovation loans (and don’t advertise this on their websites.) All you have to do is visit www.renofi.com - no need to call dozens of different loan officers and compare different banks - RenoFi will match you with one of our credit union partners that serves your area and can give you the best rates.
This last reason why you’ve probably never heard of renovation loans has more to do with secured loans in general than renovation loans specifically.
The housing crisis in 2008 has made many homeowners wary of “over-leveraging” their home equity to pay for home improvements, out of fear of a similar crash and their homes going underwater.
While this is a very real fear, renovation loans had nothing to do with the 2008 financial crisis.
The reason that renovation loans take so long and require so much paperwork is to protect borrowers and lenders. Renovation loans require a certain credit score, they require income verification, as well as a maximum debt-to-income ratio.
Sometimes homeowners are surprised that renovation loans allow you to borrow so much. Renovation loans are based on the “after renovation value” of your home, which is determined by an appraiser who evaluates your home and your renovation plans.
This often allows homeowners to borrow more equity than they currently have. However, this is not a result of predatory lending - it’s a result of underwriting and appraisal practices specific to renovation loans.
RenoFi Loans Are Not Traditional Renovation Loans
RenoFi Loans were created to give homeowners the added borrowing power without the hassle. RenoFi Renovation Home Equity Loans help homeowners in need of renovation loans that are deterred by lengthy draws and inspections.
When most people find RenoFi Loans, they’re apprehensive because they sound too good to be true.
Here’s how RenoFi Loans are different from traditional renovation loans, like FHA 203ks and Fannie Mae Homestyles:
RenoFi Loans are structured like home equity loans, not first mortgages: While traditional renovation loans are first mortgages, RenoFi Loans are structured like home equity loans, sitting in second position.
This means that you don’t have to refinance your first mortgage. For homeowners who’ve just refinanced or previously locked in a great rate, this is a serious positive.
RenoFi Loans are just like regular home equity loans and HELOCs, except you get 11x the borrowing power. Ie., if you know your home renovation will increase the value of your home, you can borrow a lot more upfront.
Try the RenoFi Loan Calculator to see how much you can borrow.
They don’t require inspectors: While RenoFi Loans do take a lot more time to apply and qualify for than say, personal loans, you’ll get all the money to give to your contractor up front. No consultant, no draws, no inspections.
This means that contractors are much more willing to work with RenoFi Loans.
RenoFi makes it easy for contractors - all they have to do is provide a couple references and answer a few basic questions about their work history. It’s not mountains of paperwork, it’s one form. And, they don’t have to wait for inspections from a consultant to get paid.
Most People Use Cash to Fund Home Improvements
It’s also important to note that In the U.S., the majority of home improvement projects aren’t funded through a loan at all - most people use savings, cash, money from selling a previous home, or even money borrowed from family members.
Unlike other major expenses like new cars or college tuition, many of which cost significantly less than a home remodel, for home renovations, cash is the default.
Not only that, when you ask for advice from a friend on how to finance a renovation, in-person or even on an online forum such as Reddit, you’ll get answers ranging from advice to only renovate what you can afford right now, to harsh criticism for even considering a loan.
Most Common Loan Options for Home Improvement
In the case that anyone will even advise you to use a financing option at all, most people will recommend one of two main options:
Traditionally, one of the most popular uses for home equity and cash-out refinances has been home improvement projects, among other things like tuition or medical expenses. Home equity loans and HELOCs, as well as cash-out refinancing are also offered by most lenders.
RenoFi Loans are home equity loans, with more borrowing power
The great thing about RenoFi Loans is that they take on the exact same structure as a typical home equity loan or HELOC that most folks are familiar with or already considering - they just offer a lot more borrowing power.
Take a look at this example:
Most new homeowners need that boost in borrowing power, as the traditional home equity products don’t provide it.
The great thing about RenoFi Loans is that as soon as your project is finished and your home hits that pre-determined “as-completed” appraisal value (assuming you carry out your renovation plans), your loan functions just as a typical home equity loan or HELOC would.
How RenoFi Can Help
If you’re looking for the best home renovation loan to finance your renovation project, it helps to have as much information as possible.
And that’s why we’re here.
RenoFi can help you learn more about your loan options and find the best lenders available to get you started.
RenoFi Renovation Loans not only increase your borrowing power based on the after renovation value of your property, but they offer lower interest rates and monthly payments than almost any alternative.
Plus, we partner with awesome credit unions (here’s an example) who help us offer these lower rates and give you even more flexibility based on your financial situation.
Sound pretty great? Click the button on the right to Link to Find a Lender .