Getting a Renovation Loan on Inherited Property

Inheriting a property can be a blessing and a burden. While you may have gained a valuable asset, inherited properties often need repairs and upgrades. As the new owner, those renovation costs fall on your shoulders.

Taking out a renovation loan allows you to finance necessary updates to make the inherited property livable or sellable. Below we’ll explore how renovation loans work, what qualifications lenders look for, and tips for securing financing on an inherited home.

What is a Renovation Loan?

A renovation loan combines a mortgage with funds earmarked for repairs and upgrades It’s designed for homeowners who’ve purchased a fixer-upper property or inherited a home in disrepair,

With a renovation loan, you receive a single lump sum to cover both the home purchase price and rehab costs The loan is secured by the property itself. You make one monthly payment, part of which goes toward the mortgage principal and part toward the renovation portion

Renovation loans typically come in two structures:

• FHA 203(k) loan – Backed by the Federal Housing Administration, 203(k) loans can finance purchases plus renovations up to $35,000. You must live in the home as your primary residence.

• Proprietary renovation loan – Offered by private lenders, these loans have higher limits, less red tape, and don’t require owner-occupancy. However, they often have higher interest rates.

Qualifying for a Renovation Loan

Borrowers must meet certain criteria to qualify for a renovation loan, including:

• Credit score – Most lenders require a minimum credit score between 620 and 640. The higher your score, the better your chances of approval.

• Downpayment – Expect a downpayment between 5-25% of the total loan amount. FHA 203(k) loans need just 3.5% down.

• Debt-to-income ratio – Your total monthly debt payments, including the renovation loan, should not exceed 43% of your gross monthly income.

• Home appraisal – The property must appraise for enough to support the loan request. Any renovations must make financial sense.

• Contractor requirements – For 203(k) loans, you must use a contractor licensed in your state. They’ll provide rehab quotes and manage the work schedule.

• Inspection guidelines – The lender will want to inspect repairs at certain milestones before releasing additional renovation funds.

Tips for Securing a Renovation Loan

Here are some tips to boost your chances of qualifying for a renovation loan on an inherited property:

• Shop around – Compare rates and terms from multiple lenders to find the best fit. Mortgage brokers can help match you to the right loan program.

• Highlight your creditworthiness – Maintaining good credit and limiting debt will make you look reliable. Bring documentation to prove income and assets.

• Know your property’s value – Get an appraisal to confirm the home’s fair market value and the return on planned renovations.

• Itemize repairs – Detail all updates with expected costs from a licensed contractor. This shows the lender your rehab budget is realistic.

• Put more down – Increasing your downpayment percentage can help offset credit or income issues. Bringing, say, 25% down shows you’re financially committed.

• Ask about exceptions – If something disqualifies you, like your debt-to-income ratio, ask if the lender has any exceptions or alternatives.

Using Renovation Funds Wisely

Once approved, use your renovation dollars strategically:

• Focus first on repairs needed to make the home livable, like plumbing and electrical systems. Cosmetic updates can come later.

• Only take out funds needed for each project phase. Don’t withdraw the full amount upfront or pay for renovations out-of-pocket without approval.

• Closely oversee contractors and keep receipts for all materials and labor. You may need to provide renovation documentation to the lender.

• If costs exceed the loan’s rehab allocation, talk to the lender before paying anything further out-of-pocket. They may approve a contingency reserve.

• Adhere to the work timeline. The loan terms require you to complete all funded repairs within a certain period, usually 3-9 months.

Alternatives to Renovation Loans

If you can’t qualify for a renovation loan, consider these options to finance inherited property updates:

• Personal loan – An unsecured personal loan lets you borrow a lump sum for renovations. However, you’ll pay higher interest without the property as collateral.

• Home equity loan – If you inherit the property free and clear, a home equity loan lets you leverage its equity. Useful for minor updates.

• Cash-out refinance – Once you own the home, you could cash-out part of its value through a refinance to fund renovations.

• DIY repairs – Doing the work yourself saves labor costs, but only tackle updates within your skill level.

• Sell as-is – Rather than renovating, consider selling the inherited property in its current condition.

Summing Up Renovation Loans

While renovating an inherited home takes careful planning, the right financing can make the process seamless. Explore both public and private renovation loan options to find the best mortgage structure and terms for your project. And remember, the more attractive you look on paper as a borrower, the easier it will be to get approved.