Show me the money! How to finance a historic-home project

I wrote this article for Idaho Falls Magazine, and I thought you might like to read it too. I hope this is enlightening and encouraging for those of you hoping to fix up an old house of your own:

A project of historic proportions

Have the itch to fix up an old house? You’re not alone. Cable networks make millions off programs where a historic home is old and in shambles one day, magazine-worthy the next. Here, a few financial options for taking on a project like this.

By Rebecca Long Pyper for Idaho Falls Magazine

Anyone with even a smidge of interest in the housing market and home decorating knows that nowadays, one of the “it” projects is buying an old home and fixing it up.

But you’ve heard the whispers. You don’t know what’s in those walls. It’ll be a money pit. And how do you pay for a project like that anyway?

Buying and remodeling an old house can be trickier than it looks on TV, and the challenge begins with financing.

Opinions on funding old-house projects vary based on whom you talk to and what kind personality you have. If you want to buy an old house and fix it up immediately, you can do it — but you might not love the terms. Or you might be fine with them if they land you a dream home.

Here are two perspectives on financing old-home projects, plus advice from one local lady who has renovated old houses for decades and learned how to save the good stuff while saving a few bucks.

Working with the bank

Folks determined to buy and fix an old house do have options, said Bank of Idaho mortgage loan originator Jack Yasaitis. He suggests considering one of these approaches:

  1. A mini construction loan or purchase/construction loan. At closing, the seller gets paid for the house, but funds still exist within a construction loan. Those funds can be used to for whatever your house needs — updated electrical, plumbing, a new kitchen, you name it. The amount available as part of this “construction loan” is determined by bids for how much the work will cost. This short-term financing usually comes with a six-month term for finishing the work.

Once the remodel wraps up, the lender creates a traditional long-term loan. This can be conventional, FHA, or maybe even a VA loan, so ask about the option best suited for you.

The key to making this hybrid option work is to have long-term approval at the front end. This, of course, will be dependent upon how much you are able to borrow and the projected value of the home after updates.

“It’s two loans that have to be approved. I work on getting the long-term loan approval first. This loan will cover the short-term financing for improvements,” Yasaitis said.

  1. Look at a Limited 203(k) Mortgage. This type of loan allows homebuyers to make cosmetic changes with borrowed money — no structural stuff or electrical and plumbing updates. According to hud.gov, the program allows homebuyers to finance as much as $35,000 into their mortgage to “repair, improve or upgrade their home.” For more information, visit hud.gov and search “203k.”

Making your money work for you

For more conservative types, a loan that covers the home’s purchase price and its repairs might not be right for you, said InterWest mortgage loan officer Sean Finch.

First things first: Not a single government-backed mortgage agency offers a loan that covers the cost of a house plus funds that can be used at your discretion for fixing it up, Finch said.

With that in mind, making the most of your piled-up cash might be the best option. It’s Finch’s favorite suggestion when people call his office suffering from HGTV fever. Instead of putting down, say, 30 percent on the home purchase, he suggests putting down the minimum percentage and using what’s left in your account to pay for improvements. What about PMI? He still likes this approach better than the alternative.

That’s because the common alternative — that mini construction loan described above —requires double closing costs. Let’s say you find a house for $100,000 and want to put $50,000 into fixing it up. It is possible to secure a single $150,000 loan, but beware of a looming balloon at the end of the short-term construction loan. A buyer who chooses this approach must plan to refinance at the end of the term to prevent owing the entire amount at once.

Yasaitis concurs but notes that although each loan process requires individual closings, loan originators like him strive to use the same services for each loan to minimize costs such as the appraisal, and a credit would be issued for title insurance from the construction loan that would be applied to the long-term loan closing. For more details, talk to your loan officer.

Before the housing-market crash in 2008, non-conventional loans abounded. Independent mortgage lenders loaned money on their own terms, and Finch expects those kinds of loans will return but with stricter approval guidelines to make sure borrowers and lenders do not get too aggressive — “but this will not happen until investors forget about the crash,” he said.

Read the entire issue of Idaho Falls Magazine here. And check back Monday for the rest of the article, based on an interview with one of my favorite historic-home buffs. See you soon! •

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