Kevin Kell
Perhaps because of the challenging economy of the last few years, even with the improving housing market many homeowners are choosing to stay put. Instead of upgrading to a new home, they’re upgrading the one they have – making additions and renovations.
As you might expect, finding the right financing to assist with the cost of improvements is critical to the process. The good news is that banks have money to lend. But just as you’ll look for the right architect and contractor, you’ll need to find the bank that fits your renovation.
Talk to your bank and others and find out their level of interest and expertise in funding your addition or renovation. Not all banks are making this particular kind of loan. To help find one that is, ask your accountant, insurance adviser, financial planner or other trusted advisers for a referral. And, again similar to what you would do in selecting an architect or builder, ask the bank for references of other clients that they have helped with this type of financing.
What will a bank want to know? Gather your last three years of tax returns and proof of the current year’s income to demonstrate cash flow to repay your loan. Complete a personal financial statement that lists all of your assets and liabilities. Of course, you’ll also need to determine the cost of the renovation. This probably will involve working with an architect on initial plans, then bidding those out to several contractors.
One of the ultimate goals of this process – other than the goal of your fabulously reinvigorated home – is determining the estimated value of your home both as is and after the renovation. The bank will do an appraisal to confirm the collateral value and, to the degree you can estimate these values in advance, you can minimize the potential for a large variance in what you think your home is worth and what the bank’s appraiser comes up with.
Be sure to include additional time and dollars for contingencies. You have heard many times that renovation and construction take longer and cost more than you think or may want to believe. Build in some contingency in terms of how long you have for the renovation loan and have extra dollars approved or set aside for change orders or cost overruns. Most construction loans are 12 to 18 months.
That’s right: Your renovation loan will likely be for a limited duration. If you will want a long-term mortgage, line that up in advance so you have an orderly transition from the short-term financing to the long-term repayment. The bank or lender doing the construction lending will want a permanent “take out” letter stating how and where you will get your permanent financing. You will likely find more options for the long-term financing than for the short-term renovation loan, but you will benefit overall by finding a single institution that can offer you both. (This is a great banking tip in general: Banks are looking for a “full relationship,” not just “one offs.”)
As with your architect and other project partners, don’t make the decision on your construction lender just on price. You could come to regret selecting the bank that offers the least expensive financing if they cannot deliver on service and provide the relationship you may need when things don’t go exactly as planned.
For instance, will there be unnecessary delays when it is time for the payout of a portion of funds? A renovation project can take twists and turns and you also will want a local bank and a relationship such that your bank contact can come out to your house and see the project. It is helpful if the banker understands the local real estate market.
Good planning on how you are going to finance the cost of your addition or renovation will make the journey more pleasant. Think of it this way: Your banking partner is your financial architect.
