Realtor Maria Rüggeberg explains how to finance improvements for a home you plan to buy
A Greenwich Time reader recently asked about the process of buying a home that needs some repairs or renovation work—and whether financing those improvements is possible. There are two types of mortgages that include home improvement financing. The first is a Purchase/Home Improvement Loan. This requires the buyer to enter into a purchase agreement for the property and at the same time have an agreement with a general contractor for the amount of the improvements. The subject property is appraised for its future value after the improvements. Based on the “Loan to Value” (LTV), the amount of the loan is then determined.
The other loan option is a Refinance/Home Improvement Loan. In this case, the borrower already owns the property and must show proof, such as a deed of title commitment. The funds are disbursed to pay off any existing mortgage, as well to pay the construction costs. The LTV also determines the amount of the loan.
All “Construct to Permanent” loans require a general contractor who is licensed or registered by the state or municipality for the type of construction or home improvement being contracted. The borrower may not act as their own general contractor, nor can the contractor be related to the borrower. A building permit is required prior to any construction advance. The borrower’s funds are not collected at loan closing, because they are used to fund construction prior to post closing disbursements. There is a disbursement schedule for completed work that has been inspected by an authorized assigned inspector/appraiser. Finally, there are fees that must be paid by the borrower at the closing. While the procedure is detailed, these alternatives give more flexibility to buyers that purchase homes in need of improvements.