Q&A on closing a Renovation (RENO) Loan for that diamond in the rough

Janet Jones, RENO specialist — Janet Jones, Renovation Specialist Wells Fargo

When I recently called a loan officer I knew at Wells Fargo for a buyer needing urgent assistance after a lender went AWOL on them in the middle of the transaction, I was surprised to learn that the property they were buying that was in need of capital repairs would be eligible for a “RENO” loan. It could be treated like a conventional loan with competitive interest rates and loan terms. Living in a world of hundreds of acronyms, I first asked the officer if she was now based in Reno, Nevada and she chuckled and said it stood for “renovation” loan. Duh.

Well, she quickly moved on to qualify the borrower, the property and close the deal in record time. Escrow deposit saved. Buyer no longer living in a hotel. I wanted to learn more about this loan tool for our realtors and their buyers who wanted to pursue properties that had a lot of potential, but would not qualify for traditional financing where everything must be shiny enough to pass a battery of insurance and lender criteria. Here is a basic Q&A presented by Janet Jones, Home Mortgage Consultant, Renovation Specialist at Wells Fargo that real estate professionals may find useful:

How does a RENO loan generally work and what are they generally used for? Renovation loans allow the client to purchase or refinance a home and add the cost of the improvements to the loan.. so there is only 1 mortgage! Most often in a purchase situation they are used when a client wants to buy a home that will not meet conventional or FHA property standards. If the home won’t pass an appraisal then repairs required would have to be done before closing and often the seller does not desire to do the repairs or have the funds to do so. The buyer cannot do the repairs before closing because they do not own the property. So.. the deal would be dead unless the buyer has cash. The renovation loan is the solution in this case as it will allow the buyer to write a contract on the home in almost whatever condition it is in and then obtain a bid for the repairs from a licensed contractor. The contract + bid for repairs + 10% repair contingency are added together to create the total project and then the lender determines the loan from there. The repairs are approved and contractor is validated and once the loan is closed and the buyer owns the property the repairs/renovations are done. The lender holds the money for the repairs in an escrow account that is distributed in draws during the repair/renovation phase. How the contingency works is the 10% is added for “surprises” and cost overruns. If funds are not used they are applied to the principal of the clients loan. Another scenario that renovation is used for is when a buyer finds a home they love or location they love but the home itself is missing something the buyer really desires in a home or the home is dated and they want to remodel the kitchen or bathrooms etc. Currently we have a project for an existing homeowner whose home they have out-grown with new children additions so using the renovation loan to add additional square footage.
What type of property is best suited to be considered for a RENO loans? Product works great for single family homes up to 4 unit properties. It allows for various configurations to be made so someone could convert a 4 plex to a duplex or duplex to a 3 plex…. Or even convert a 6 plex to a 4 plex. The max final project must be 4 units or less.
Purchase or refinance? Both.
Residential or commercial? Residential. Individuals using the conventional renovation loan can purchase investment properties.
What is the loan amount range? Max loan at Wells Fargo on conventional in FL is $417,000. We are piloting a non-conforming product in CA but not available to FL as of yet. On FHA the max loan is the max loan per county as on a regular FHA loan without renovation. So the project can be any amount but there is a max we can lend.
What are typical interest rates on these type of loans? They are normally approximately .50 point higher than your typical mortgage.. but varies with loan parameters i.e. primary v.s. investment etc.
Term periods for loan? Fixed rates and ARM loans are available with various terms. While product specific you can see 5/1, 7/1, 10/1 ARMs, or 15, 20, 30 year fixed.
Are condo renovations considered? Condo’s can be considered but come with considerable requirements. FHA has a limited number of condo’s currently approved.
What is the closing time frame for approval for this type of loan? This often depends on the cooperation of all the parties involved. I would give yourself 60 days.
Should anything special be written up in the sales contract when buyer will be using a RENO loans? The contract should state in the comment section the buyer is obtaining a Renovation Loan and the contract can also note if loan is conventional or FHA.
Should a borrower identify a contractor prior to writing up the contract and check with WF if the contractor is an approved contractor prior to applying? All contractors must be properly licensed and will be validated. If the job involves several various repairs involving multiple specialties a licensed general contractor will be required. It is a good practice to determine if the contractor has the proper credentials before spending considerable time with them preparing a bid for renovations. Clients can check with us to see if a contractor was prior validated but keep in mind the validation is always updated with each project.
What additional loan charges can a borrower expect at closing for this type of loan? Appraisals normally run about $100 more, based on the type of loan and scope of work there will be draws for the contractor and those are typically $150 each, if a 203K standard a HUD consultant is required to be hired and their fees will be determined by project size. Check HUD.gov for grid. On a conventional loan often a feasibility study is required to review the project and has a cost of about $295, there is an origination fee just on the repair portion of 1.5% or $350 whichever is more with max of $750 and title update is done when project is finished. Not sure if you want to actually state the fee amounts.. or just note the items that are different ??
Are there any ongoing loan charge outside of closing that they should plan on i.e. escrow holdback for contractors? All items should be included in the loan.
What time period does construction have to be completed in? Minimum allowance is normally 30 days with projects up to 6 months or longer with approval based on scope of project.
How does a the bank calculate the “appraisal” for this type of loan? Lenders use an “after improved” value. The contractor bid for the repairs/renovations is key to the appraisal being ordered as the appraiser must be given the bid so they know what the scope of work is to be done. The appraiser will appraise the property as if the renovations have been done. Based on the type of renovation some items will warrant more value than others.
Anything additional you would like to add? Conventional has no repair minimum. FHA 20K Limited has no limit. FHA 203K standard has a $5000 limit on repairs. Purchase Primary transaction —- Conventional minimum down is 5% and FHA is 3.5% of the total project. Homes have to be CO’d for a year for FHA and if conventional have to be deemed substantially complete ( i.e. utilities and drywall).

More question on renovation loans? Please contact Janet Jones directly at Tel 941-468-4296 or [email protected] and The Closing Company, Inc for your title/closing needs at [email protected] or 305-521-2080.