You know that the amount you can borrow on a mortgage is dependent on the home’s value. But is there ever a time that you can borrow more than the home’s value?
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It sounds crazy, but there are two situations when you can borrow more than a home is worth. Both of the situations pertain to the renovation loan, though. The Fannie Mae HomeStyle loan and the FHA 203K loan both allow you the ability to borrow more than the home is worth.
How it Works
If you want to make renovations to your home but you don’t have the money to do so, you may turn to your mortgage lender. The typical route a borrower takes is to take out a home equity loan or home equity line of credit. While this is a nice option, it doesn’t help you if you need to borrow more than the home is worth. Typically, home equity lenders allow you to borrow up to 85% of the home’s value. If that’s not enough, you can turn to one of the two rehab loans.
Both loans allow you to refinance your existing mortgage and take out enough money to complete the renovations on the home. The lender will allow you to borrow as much as 115% of the ‘after repaired value’ of the home. In other words, the appraiser will let the lender know how much the home will be worth after the improvements are done that you intend to do.
You provide the lender with the blueprint and outline of the work you plan to do and the appraiser will take the renovations into consideration when coming up with your home’s value. It’s that simple. Of course, the lender has to approve the work that you want to do and it must fit within the designated budget according to the after repaired value of the home.
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Disbursing the Funds
The lender will refinance your loan and pay off your original lender. The remaining funds are placed in an escrow account. The contractor can start the construction as soon as you close on your loan. The contractors have 6 months to complete the work.
The bank will oversee the work that the contractors do and pay them according to a pre-determined disbursement schedule. They will pay the contractor in phases. As each phase is completed, the lender will inspect the work and pay the contract if the work is done as promised.
Qualifying for the Rehab Loan
Qualifying for the rehab loan isn’t as tough as you might think. The FHA 203K loan obviously follows FHA guidelines. You must meet the following:
- 580 credit score
- 31% total housing ratio
- 41% total debt ratio
- Stable income
- Stable employment
- No recent foreclosures or bankruptcies
- Proof that you will occupy the home as your primary residence
The Fannie Mae HomeStyle loan has the following requirements:
- 680 credit score (in most cases)
- 28% housing ratio
- 36% total debt ratio
- Stable income
- Stable employment
- No recent foreclosures or bankruptcies
The Fannie Mae HomeStyle loan often has lower insurance premiums and it doesn’t require you to live in the home as your primary residence. You can use it for your second home, investment home, or vacation home too.
If you don’t have enough equity in your home to get a home equity loan or line of credit, or you just like the idea of having one loan for everything, the FHA 203K or Fannie Mae HomeStyle loan can be a good option.