Renovation mortgage loans are a popular mortgage type in Arizona. Why? The “flip and fix” market has dried up. As a result, more homes on the market need of TLC. Buyers turn to renovation home loans to finance the required TLC.
What is a Renovation Home Loan?
A renovation loan (aka “reno loan”) allows a homeowner to finance repair and renovation costs into their home loan. In addition, reno loans come is different varieties. From FHA to Conventional to VA, each reno loan functions very similarly. They all assist homeowners with financing rehab and renovation costs. The key to a renovation loan is something called the future appraised value.
Future Appraised Value is Key to a Reno Loan
Most importantly, renovation loans allow borrowers to use the future appraised value. The future appraised value of a home equals an appraisers estimation of what the home’s value will be after renovations are complete. Rather than wait for the renovation completion, appraisers use contractor’s bids to predict future value.
First and foremost, the borrower’s lender collects bids from the contractor(s) doing the renovation work. Next, they submit the bids to an appraiser with a request for a future value appraisal report. After that, the appraiser values the home considering what the renovation would add. Finally, an appraisal showing the estimated future value of the home is provided to the lender.
Why a Future Value Appraisal is so Important
The down payment on a reno loan is based on the future appraised value rather than current value. This gives a homeowner the opportunity to finance more toward renovations.
By Jeremy House