It’s not always going to be a slam dunk to close a home remodeling job, particularly in situations where a contractor quotes the cost of a home improvement project that’s a little too steep for a homeowner’s wallet. However, the relationship doesn’t have to end immediately. There are several economical home-improvement financing tools available to consumers--many of them sponsored by the federal government.
203(k) Loan
One of the most popular home improvement products developed by the U.S. Department of Housing and Urban Development is the 203(k)-purchase/rehabilitation mortgage. The HUD-insured 203(k) loan allows borrowers to finance the purchase or refinancing of a house and the cost of its rehabilitation through a single mortgage.
Borrowers of all income levels are eligible and the types of properties that qualify for the 203(k) loan include one- to four-family properties and condominiums. The remodeling job usually involves interior work such as remodeling a kitchen or bath, new flooring, painting, although borrowers seeking a 203(k) loan will sometimes hire a contractor to install new siding or to rebuild the roof. Contracting jobs normally range between $15,000 to $40,000, according to Chip Beveridge, a mortgage professional with North American Mortgage Company, Annandale, VA.
Once a 203(k) loan is approved, the money for the remodeling project is placed into an escrow account. "You don’t get everything up-front but a contractor can draw on the money whenever he needs to," says Beveridge. "Like everything else in this world you need to do the work to get paid."
HomeStyle and HOMEWORKS
Fannie Mae and Freddie Mac, each have developed competing purchase/rehabilitation loan products very similar to the HUD 203(k). Fannie Mae’s product is called the HomeStyle loan, while Freddie Mac’s purchase/rehab mortgage is called the HOMEWORKS loan.
Remodelers wishing to participate in a 203(k) transaction do not need to be licensed by HUD, Fannie Mae or Freddie Mac, but some lenders will ask to see a resume to make sure they are qualified to handle the project. "The lender is taking on all the risk, so we want to make sure the contractor knows what he is doing," Beveridge says.
Darryl Hicks is associate editor at Dworbell, Inc., a Washington, D.C.-based holding company that manages several housing-related trade groups, including the National Renovation Lenders Association and the Home Improvement Lenders Association. Previously, Darryl wrote for National Mortgage News, a weekly trade newspaper covering the mortgage industry.