Television has glamorized the “fixer-upper.” It is this fun, cute little process with slim mention of cost or details. The before and after pictures are the highlights, the in-between is dramatized or not mentioned, and the end results always work out for everyone. Knowing that this is most people’s perception of renovations, I advised my friend Lauren to proceed with optimistic caution when she came to me with her ideas and dreams of her first home.
Lauren wanted something very specific, but very smart. She wanted to find something that needed some work – something she could make her own – but also something with owner occupant income-producing (short term rental) potential. At first I thought this was a long shot, but fortunately, my lender, Brian McGuinness, will get creative yet will always be ethical and realistic.
Lauren qualified for a conventional loan, but also a renovation loan on top of that. Note: she had to qualify for the combination of the two – not just the sales price of the house. It’s not done often, but it is possible, should the home as an investment be strategic, and the market look similar to – well – Donelson. Just for reference, Donelson is easily one of the fastest appreciating areas of Nashville. Donelson is MLS area 7 (Davidson County is divided up into 8 areas). Average days on the market for all of Davidson County as of end of May 2018 is 55 days YTD. Average days on the market YTD in Donelson is 45, but comparable homes to this specific one are on the market an average of 14 days. Thus, prices are climbing and will continue to climb so long as demand remains high.
It’s important to consider this type of loan because there are many properties in this area that go unnoticed or seem unattainable because of their condition. However, with a little TLC, they could be exactly what you want.
Ultimately, talk with your lender (or mine, please) about this process. The pre-approval process is similar to the normal situation, except you are qualifying for two different loans, and typically, you close twice, instead of once. The house needs to be in an area and of specifications to where the value would exceed the amount of borrowed money put into it. The funds for the construction loan act as the purchase money funds, and in the right situation, you’ll be able to use the remainder of the available line of credit towards financing the renovation of the home. The construction loan is not a traditional mortgage, and it will have to be paid off or refinanced within 36 months, usually. The permanent mortgage is used to pay off the construction loan, and is done through a normal refinance process. The appraisal is done on the home with the idea of what it would be worth after the repairs and renovations are completed. Adding square footage is an option!
A few key pros:
you are able to use the “future” value of the home when calculating maximum loan amounts – up to 90% of the value on owner occupied properties
you get to finance the cost of your repairs, rather than coming out of pocket
you can lock in your rate for the permanent, traditional mortgage while in construction phase
you are able to put your “stamp” and decide the style of your home
A few key cons:
you have to close twice – one time close construction to permanent loans are rare and often pricier than conventional financing
you have to have the right house – cosmetic repairs are not typically worth this process; true fixer-uppers are the only homes worth considering
My hope in presenting this information is to inspire creativity in the home buying process. Our supply of affordable, move-in ready houses for the first time homebuyer are dwindling as Nashville makes the transition from a medium-sized city to a large one, and prices react accordingly.
One of the most valuable lessons I learned early on was that it’s okay to admit you were wrong or that you don’t know something. I explained to Lauren early on that I hadn’t done this before, and it ended up being fun to learn together. People always respond better to honesty than to arrogance, anyway.
Brian McGinness contact info:
Licensed Mortgage Loan Originator
6100 Tower Circle, Ste 600
Franklin, TN 37067