Fixing up a home costs money. If you do not have the money, you are not out of luck. There are renovation loans available that help you purchase/refinance and renovate a home. What if you have a home worth more than the standard conforming limit, though? The good news is that you can find a jumbo renovation loan with a variety of lenders. Understanding the limits and what to except can help the process go smoothly for you.
When Do You Need a Jumbo Loan?
First, you must understand when you need a jumbo loan. Conforming loan limits right now equal $424,100. If your loan amount exceeds this amount, you automatically need a jumbo loan. This is the case whether you need government-backed financing or a conventional loan. Anything exceeding the standard conforming limit is considered jumbo.
You likely know if you need a jumbo loan if you already own your home. You know the amount of your first mortgage. If you plan to add the costs of renovations to this amount, it will obviously be even higher. Even if your first mortgage balance is less than $424,100, but you add renovations that bring it above that amount, you end up with a jumbo renovation loan.
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How the Jumbo Renovation Loan Works
You can use the jumbo renovation loan in two ways – to purchase or refinance a home. We look at both here:
- Purchase – If you purchase a home that you want to make changes to, you can wrap the costs of the changes into your loan. The seller receives the money you agreed to pay him in the sales agreement. The rest of the money goes into an escrow account. The lender handles the funds, disbursing them as scheduled prior to closing.
- Refinance – If you refinance your existing home, you can pay off your original mortgage while adding funds to fix up your home. This is an alternative to the standard home equity loan.
Whether you purchase or refinance a home, the process works in much the same way. When you apply for the loan, you have to tell the lender what changes you plan to make. The lender then has to approve those changes. They use a variety of methods to determine if what you plan is worth it. Basically, they want to see that there will be a return on your investment. If the changes you want to make do not increase the value of the home, it is not worth it to the lender for you to make those changes.
On a jumbo renovation loan, you generally borrow more money than the home is worth right now. Essentially, this puts you upside down on the loan. However, the lender and the appraiser work together to determine the future value of the home or the ARV, after repair value. This is the predicted value of the home after the designated changes are made. Depending on the lender, you may be able to take out up to 110% of the ARV of the home.
Every Lender Differs
Because jumbo loans are not overseen by Fannie Mae or Freddie Mac, they are considered portfolio loans. The lender that offers them usually keeps the loan on their own books. This means they call the shots. They decide what changes you can make, what qualifications you need to obtain the loan, and anything else you need to meet to have the jumbo loan. For example, some lenders do not allow you to make any structural changes to the home with the loan’s funds. Other lenders only allow a specific dollar amount worth of changes.
The Benefit of the Jumbo Renovation Loan
The main benefit of the jumbo renovation loan is the ability to have one loan. When you have to take out a home equity loan or line of credit, you have two mortgage payments to make. This means two interest rates and more closing costs. Home equity loans often have higher interest rates than first liens because they are in second position. Oftentimes, in the face of default, second lienholders do not see a dime of the money they are owed. When you take advantage of the renovation loan, you have a loan in first lien position which usually means more favorable terms.
Shop Around for the Loan
Keep in mind that the jumbo renovation loan is not a common loan type. You may have to shop around to find a lender willing to provide you with a loan. Again, because lenders have their own requirements, you may have a unique situation that no lender wants to touch. This does not mean you should give up – instead, shop around outside of your area. There are lenders who specialize in jumbo loans, but they may be located throughout the United States, rather than right in your area.
The jumbo renovations loan is a great way to get large renovations done. Whether you have to replace the plumbing or electrical system in your house or you want to completely remodel your kitchen, the loan works for these purposes.
Make sure you are very clear with the lender about what changes you want to make and how they will impact your home. Generally, any luxury changes will not benefit you in the long run as they are often overlooked in the appraisal. Many lenders turn these types of changes down. As long as your renovations are mainstream and show that they add function to the home, a lender may be willing to help you make them a reality.
Keep in mind, you will pay a slightly higher interest rate for this loan not only because it is a jumbo loan, but also because it is for more than the current value of the home. In the end, though, you may see a great return on your investment, helping you to make the changes to your home that help put more money in your pocket in the long run.