A home renovation loan, also called a Limited 203(k) loan, may be a great option if you are looking to buy your very own fixer upper.  But how do lenders determine what they are willing to lend you to complete the work?  The process is actually fairly easy when you work with people who know what they are doing.

You, the borrower, start by choosing a property, lender, and general contractor.  Look for a lender who has experience working with 203(k) Consultants as they help keep the transaction and renovation on track.  It is also important to find a GC who has experience with this type of loan.  The lender typically pays out in disbursements, often after the work has been completed.  This means that, unless you will be contributing some money up front, the GC will have to float some of the costs of labor and materials until he gets paid.  If this is something your contractor is not comfortable or willing to do, it can hold up your project.  You also need a contractor who is thorough and will regularly communicate with the inspectors and lenders to keep things on track.

So how does the process work?  The lender will order an appraisal.  The appraiser uses documents from the contractor to arrive at an estimate of fair market value after the repairs are completed.  This is another reason a thorough contractor is necessary.  The more detail provided to the appraiser, the easier the approval process. These are some of the things that they may ask for:

  • Copy of the contract, including complete description of the plans
  • Detailed cost breakdown by line item
  • Proposed floor plan
  • Architectural or design drawings
  • Permits and licenses

The lender will then use the information from the appraiser to calculate the loan amount and the loan can proceed to underwriting.  If all is approved, you will be able to start the permit process and renovation as soon as you close on the house.  Custom Homes Building and Remodeling is familiar with this type of project and we would be happy to help you with any additional questions that you may have.