With the aging population and in turn more children seeing their parents move in with them or couples having more children, many borrowers are looking for a solution to the lack of space in their homes. An addition to the home and updates to the bathrooms and kitchen are usually the biggest adjustments couples (borrowers) make to their homes when confronted with space issues.
Some borrowers will borrow money from family and friends to pay for the additions and upgrades to their homes. Others will use credit cards or utilize a home equity line of credit. Lastly, some borrowers will use a Construction Loan to pay for the additions and upgrades.
Renovation Construction Loans and Construction to Perm (CTP) are interchangeable terms. The CTP loan is used for the financing of the renovation.
What is a Renovation Construction Loan and how does it work?
A Renovation Construction Loan is typically classified as a Refinance mortgage. The borrower takes the current principal balance of their mortgage and adds that to the cost of the renovation. The lender then will base the loan off of the appraised value of the home AFTER renovations but prior to closing the loan. The lender does this by sending the plans, specifications, and drawing for the renovation to the appraiser prior to closing the loan. This type of appraisal is called a “subject to” appraisal. Subject to the plans, specifications, and drawings of the renovation.
Some of the items to ask your lender when applying for a Renovation Construction Loan:
- Is the work I am attempting to get done to my home permissible under your loan guidelines? (Some lenders will only permit certain upgrades to the home. For example: some allow a pool, others do not.)
- How much equity do I need to have in my home in order to close on the Renovation Construction Loan? (Many lenders have a set loan to value requirements for Renovation Construction Loans.)
- Is there licensing requirements for the builder that will be renovating my home? Many lenders (and subsequently municipalities) have minimum incensing requirements for renovating or building a home. Most requirements center on the total costs associated with the project.
- Does closing a Renovation Construction Loan take the same amount of time as closing a traditional loan? Typically Renovation Construction Loans take a little longer (2 to 3 weeks longer) that a traditional loan. The primary reason: the appraisal. Th appraisal for a Renovation Construction Loan has a few moving pieces (plans, specifications, and drawings) versus a traditional loan.
- Are interest rates higher for a Renovation Construction Loan? Typically interest rates for a Renovation Construction Loan area little higher than those for a traditional loan. The reason: the lender is lending money on a home that does not exists yet.
There are a lot of moving piece when it comes to Construction Loans.
The key to a seamless build is putting together a dream team. At BuildButler we have put together a team of trusted professionals to help you along the way.