If you are looking to buy a home in the Chicago area, you probably know that the market is tight. There are a lot of buyers looking for the same types of property (well maintained, up to date homes that are priced right), and whenever a new listing comes on the market, there is a waiting line of buyers ready to view it. And often, ready to make offers. At the same time, there are a lot of homes that just don’t get as much love and respect. These are older homes, homes that haven’t been updated, need some work or just don’t have the curb appeal that buyers are looking for. It’s not unusual for these homes to stay on the market longer, and sell for less. But these ugly ducklings can be swans in disguise. If you are open to considering homes that might need some work, this may be a real opportunity for you. You can buy a home in a good location and improve it in the way you want to, by using a renovation loan.
A renovation loan like an FHA 203k or the Fannie Mae Homestyle loan, allows you to buy a home and improve or renovate it at the same time. We base the down payment on the purchase price, plus the cost of improvements. Buying a home and closing on a Chicago area renovation loan is easier than you might think. The key is to know how the process works, and what you need to do to help control the situation.
Here are the steps to Buying your Chicago area home with a renovation loan:
1. Get Pre-approved for your mortgage. This is the first step to buying a home, whether you buy a home that is ready to move into, or one that needs some work. Getting a mortgage pre-approval is a way to know what you can afford, and what your best loan options are before you start looking. It makes sense to do your pre-approval with a lender that understands and works regularly with renovation loans. This way you are in good shape whether the property you find is in great shape, or if it needs work.
2. Find a good Realtor. You need to work with a great Realtor who knows the areas you are looking at, and has the experience to know what problems to look out for. Finding the right Realtor partner will make the home buying process smoother, easier, and will likely save you money in the long run. Be sure to ask friends and family for recommendations, look online, or ask your lender for a good referral (we work with some great Realtors).
3. Decide on the areas you want to live in, and start looking for a home. One of the advantages of buying and improving the property with a renovation loan, is that you can concentrate on finding the right neighborhood. Even if the home isn’t perfect, you can make it the home you want to live in with the renovation loan. Get a good idea of what work needs to be done, and a rough idea of what it will cost.
4. Pick a contractor to work with. Once you have a property, we will need a contractor’s bid showing what work you are going to do, and how much it will cost. Don’t wait until you need one, start getting recommendations and seeing who you can work with early.
5. Make the offer and get the contract together. Be sure to allow enough time to get the mortgage approved. Buying with a renovation loan has more moving parts, and it does take some extra time. We generally close FHA 203k and Homestyle renovation loans within 45 days, but check with your lender to be sure of how much time it will take.
6. Do a full home inspection, with either your contractor, or a home inspector. You want to make sure you know the condition of the systems of the home as well as what changes you want to make this a home you will be comfortable with, and proud to live in.
7. Officially start your mortgage application, and finalize the home bid with your contractor. The contractor will work up a bid showing exactly what work needs to be done, and how much it will cost. You’ve already been pre-approved, so your lender will turn this into an official application. Our goal is to get this in to underwriting for the initial credit approval while you are finalizing your contractor’s bid. If the amount of work is higher than $35,000 (which includes a contingent reserve) or if there is structural work involved, you will go through one more step, and hire a renovation consultant. The consultant’s job is to make sure that all the work done correctly, and completed the way you want it to be.
8. We order the appraisal. The mortgage is based on the value of the property AFTER all the work is done. Once we have the contractor’s paperwork, we will order the appraisal.
9. Clear the conditions and final approval. Once we have the appraisal back, and we have any other conditions we needed from the initial credit approval, we put this in for the final approval. Once the underwriter clears all the conditions, we will get a clear to close approval, and you can set up a closing.
10. Closing. This is where you will sign all the loan documents and title will transfer from the seller to you, and you get the keys. Congratulations, you are now a homeowner.
11. Start the work on your Renovation. Once you close on the loan and you are the owner, the renovation work begins. The cost for the renovation was built into the loan, and for smaller projects, you may get a disbursement at closing to start the work. For bigger projects, the funds are disbursed by a series of draws. In both cases, the check is made out to the borrower and the contractor.
Once the work is done and the project complete, you have a final inspection (either by the appraiser or the renovation consultant) to make sure all the work was done as set in the original bid, and the contractor gets the final payment. Any funds left over are used to reduce the principal balance.
Again, Chicago area renovation loans have more moving parts, but they don’t have to be complicated. Knowing what to expect and what everyone’s roles are, will make this a smooth and rewarding experience.
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