Frequently Asked Questions
Loan Basics and Payments
What does my mortgage payment include on a Renovation Loan?- Your mortgage payment on a Renovation Loan includes the principal and interest on the loan, property taxes, homeowner's insurance, and any mortgage insurance premiums if applicable.
- The mortgage amount on a Renovation Loan is calculated based on the purchase price of the property plus the total estimated renovation costs, minus your down payment.
- Yes, many lenders allow borrowers to escrow mortgage payments, especially if the property will be uninhabitable during renovations. This means a portion of the loan amount can be set aside to cover mortgage payments during the construction period.
- The timeframe to complete renovations varies by loan type, but most Renovation Loans require the work to be completed within 6 to 12 months of closing.
- For owner-occupied Renovation Loans, you typically need to move into the property within 60 days of the completion of the renovations.
Documentation and Requirements
What documentation do I need to apply for a Renovation loan?- To apply for a Renovation Loan, you'll typically need proof of income (like pay stubs or tax returns), credit history, a detailed proposal of the renovation work including cost estimates, and any other documentation required by the lender.
- Depending on the scope and complexity of the renovations, you may need architectural plans. Lenders often require them for major structural changes, additions to square footage of property or any change in room count.
- While you may not need to have permits in hand prior to closing, you will need to demonstrate that you can obtain the necessary permits for the planned work. On refinances evidence of permit approval may be required prior to closing.
- Yes, you may need a builder's risk policy or a renovation-specific homeowner's insurance policy, especially if the property will be uninhabitable during renovations.
- Minimum property standards generally include requirements for safety, security, and soundness. The property must be free of health and safety hazards and major structural issues.
- It's typically the responsibility of the homeowner and contractor to determine what permits are required. However, HUD Consultant may also provide guidance. Determination of any required permits or variance approvals must be obtained prior to closing.
Renovation Costs and Contingency
What is a Contingency Reserve used for?- A Contingency Reserve is funds set aside to cover unexpected costs or overages during the renovation process. It's a safety net to ensure that the project can be completed even if unforeseen expenses arise.
- To get contingency funds released, you'll typically need to submit a request to your lender detailing the additional work and associated costs. The lender may require documentation or inspections before releasing the funds.
- Many Renovation Loans allow borrowers to include permit fees, architectural fees, and engineer fees in the loan amount, effectively reimbursing the borrower for these costs.
- Renovation contingency funds are set aside to cover unexpected costs or overages during the renovation process. They can be used when unforeseen health and safety issues arise or when additional work is deemed necessary beyond the original Specification of Repair.
- The unused portion of the Renovation Contingency can often be applied to additional approved renovations or used to reduce the principal balance of the loan. Specific uses may vary by lender and loan agreement.
Renovation Work and Materials
Can I buy the materials for my project?- Renovation Loans allow borrowers to purchase some materials directly. It's important to discuss this with the Lender and your HUD Consultant. If permitted, you will need to keep detailed receipts and ensure the materials are used for the specified renovations.
- Renovation Loans allow for "sweat equity," where the homeowner can do some of the work themselves. However, if any permits are required, the homeowner must be a licensed contractor or tradesman to obtain the permits. The borrower must demonstrate they have the time and ability, and the work must meet professional standards. Borrowers will only be reimbursed for material costs when doing any repairs themselves.
Disbursement of Funds
How are funds for repairs disbursed after closing?- Funds for repairs are usually disbursed in draws as the renovation work progresses. After certain milestones are reached and inspected, the lender releases the corresponding funds.
- The timeline for requesting and receiving funds varies, but typically, you can request the first draw shortly after closing, once the initial work has begun or materials have been purchased.
- A Material Draw is a request for funds to purchase materials for the renovation. You can request it once you have contracts or order forms for the materials after the loan has been funded. Your HUD Consultant will review the documentation and prepare a Draw Request to release up to 50% of the material cost.
- The time to receive funds after submitting a draw request is typically 5-7 business days. It may be sooner depending on the documentation.
- Funds from a draw request are sent via a dual party check payable to the Contractor and borrower.
- Reimbursement for these fees usually occurs with the first draw when a paid invoice is provided.
- A 10% holdback is a portion of the renovation funds that the lender retains until the project is completed to ensure all work is finished satisfactorily. It acts as a safeguard to ensure contractors complete the job as specified.
- Typically, once a draw request is approved, funds are disbursed within a few business days to a week.
Inspections and Appraisals
How do I close if the house is vacant and utilities are off?- If the house is vacant and utilities are off, a Renovation loan allows you to close without turning on the utilities. The contingency reserve requirement when utilities are not on is 15% of the Renovation costs.
- If the property requires a new septic system, it can be included in the renovation costs. However, you'll need to ensure that the installation meets local codes and regulations.
- If the property has a private well and septic, and utilities are off, you do not need to have the systems working to close. The HUD Consultant will advise of any additional inspections required or repairs in Specification of Repair.
- An "As-Completed" value appraisal estimates the future value of the property once all renovations are completed. It helps the lender determine how much to lend for the renovation.
- A Draw Inspection is an evaluation of the completed work to date, conducted before disbursing funds. While homeowners aren't always required to attend, it is highly recommended they are present for all inspections.
Roles and Responsibilities
Who is a HUD Consultant? What is their role?- A HUD Consultant is a professional approved by the U.S. Department of Housing and Urban Development to oversee Renovation Loans. Their role includes reviewing the renovation plans, ensuring the work meets HUD standards, and overseeing fund disbursements.
- It's typically the responsibility of the homeowner and contractor to determine what permits are required. However, the HUD Consultant may also provide guidance. Determination of any required permits or variance approvals must be obtained prior to closing.
- If you need to change contractors, you'll need to notify your lender and provide information about the new contractor. The lender may need to approve the change, especially if it affects the scope or cost of the work.
- While it's common to provide contractors with a deposit to secure their services, you should discuss this with your lender. Some Renovation Loans have specific guidelines about contractor payments.
- Identity of Interest between a Borrower and a Contractor refers to a situation where there is a close personal or business relationship between the two, such as family ties or shared financial interests. Lenders often scrutinize these relationships to ensure there's no conflict of interest that could affect the terms or execution of the renovation.
- While some lenders may allow a family member to act as a contractor, there are often additional scrutiny and documentation requirements to ensure that the work is completed professionally and at market rates.
Property Specifics
How do I close if the house is vacant and utilities are off?- If the house is vacant and utilities are off, a Renovation loan allows you to close without turning on the utilities. The contingency reserve requirement when utilities are not on is 15% of the Renovation costs.
- If the property requires a new septic system, it can be included in the renovation costs. However, you'll need to ensure that the installation meets local codes and regulations.
- If the property has a private well and septic, and utilities are off, you do not need to have the systems working to close. The HUD Consultant will advise of any additional inspections required or repairs in Specification of Repair.
- If the home is uninhabitable, you may need to make arrangements for temporary housing. Renovation Loans allow you to escrow mortgage payments during this period.
- No additional renovations can be started that are not covered by the Renovation Loan funds as stated in the Specification of Repair. Any work outside the Specification of Repair must be approved by the Lender prior to starting the work.