Some folks figure they’ll just buy the house “as is” and then get a home-improvement loan or home equity loan right after closing to do the renovations. That doesn’t actually work. Here’s why: Those loans are based on equity, which you typically don’t have right after closing. For example, if you buy a $200,000 house and put 5% down you owe $190,000 on that $200,000 home. When you go for an equity loan (at a bank or credit union) the max most will lend is 80-90% of the value. And they appraise the house ‘as is’. They don’t look at the impact of the value of the work you’re hoping to do because, well…it’s not done yet. They’ll lend only lend up to $160,000-$180,000 and you already owe $190,000. For that reason, the Home Equity option is not going to be open for years and years after your purchase.
If you really want to do the renovations, and you don’t want to wait for years afterward, the way to do this is to include the renovation budget in a renovation loan as you make the purchase. When you do it this way, the appraiser considers the impact of the improvements on the value of the home and appraises it accordingly. A $25,000 kitchen remodel or a $5,000 furnace is taken into consideration and usually allows us to include the renovations in the loan budget. You can close and get the work done immediately! One loan, one payment, and no waiting.
Renovation Loans: the better way to purchase & renovate your new home!