Financing a renovation is a challenge for many people. But depending on debt ratios and equity in the house, the opportunities are actually very plentiful. Depending on when, how and why you’re buying the property, a customized plan should be made for you with your lender and financial planner. Three common options for renovation financing are securing an equity line of credit, getting a construction loan, or borrowing from a 401(k).

The most popular option is to use equity in the house to finance the line of credit, known as an equity line of credit. This is a tried-and-true method used by owners with significant equity in the house. Most loans are going to give you 75-90% of your equity in your house as a line of credit.

Example:

• $300,000 house with 20% put down when at purchase
• Access to approx. $45,000 equity line of credit

This money is available for you to use for renovations and improvements—and you don’t pay interest on money in the credit line, only the used balance of the account.

A construction loan is the second best tool for financing a renovation. This option is best for larger scale projects, or projects for which you have a large equity position or cash-on-hand deposit you’d like to leverage for the major addition to the house. These loans are typically a 12-month interest only term for a specified amount of money, and you pay interest on the entire balance of the account the moment that the loan is approved.

The last option is a 401(k) loan. The 401k loan is a not a product, but it’s a divesting of money in your current investment portfolio. The maximum is 50% of your balance, not to exceed $50,000. The money is not taxed as income, but you may have to pay sale penalties from your investment broker. The loan must be re-paid within 5 years and can be repaid on an amortization schedule. The difficulty of this loan is that you are missing the advances in the marketplace when its withdrawn, but the benefit is that you miss the decline of the market during your withdraw. Consult your financial planner on this loan as your “cost of money” is unknown.

Once you’ve decided on the best financing option for your renovation project, you’re ready to call your architect or general contractor and start the conversation about planning the renovation.

And don’t forget to have your realtor—or better yet me—review your plans and your budget to make sure you’re adding value in the correct place in your home and maintaining relevance in the housing community!

The value of a relationship with a verified lender can be the difference between a contract that will not see closing and a successful transaction. It’s the fiduciary duty of the agent to verify and vet the buyer for his or her client. It’s also the responsibility of the buyer’s agent to vet the buyer for the seller’s agent.

I recently had an interesting wrench in one of my transactions that I feel everyone can learn from. Here’s the situation that transpired:

• Buyer was transferring to Cincinnati for a job
• He had a mortgage on an out-of-state house with USAA
• He had a strong amount of money in the bank
• Buyer thought it was in his best interest to use USAA instead of one of my preferred lenders for their home purchase in Cincinnati
• He wanted to buy a house three months in advance so renovations could be done prior to relocation
• 21 days from closing, buyer was informed that USAA couldn’t loan money “unless the borrower is within 60 days of gaining their employment”
• Buyer needed to generate an $20k additional to close with USAA

My client then asked me to delay closing from mid-March to the first of May—and that was going to be a deal breaker. When we wrote a contract for the house, we were in competing offers and ours was chosen because of relationships; both offers were identical.

Then we talked to my preferred lender, Huntington Bank, which has a portfolio product they can offer my client—a physician loan:

• 0% down payment, matching interest rate
• zero Private Mortgage Insurance (PMI)

A homerun from the local group! This information intrigued the buyer, but if the financing was changed this close to the closing, closing would be delayed.

We evaluated each option and decided to stay the course with USAA, the national provider. To overcome the underwriter’s 60 days from gaining employment rule, the buyer had to bring 5% more money to closing, approx. $19,500—a huge expense!

I was fortunate to have a great client with good financial backing who was able to accomplish the transaction and save us from a tailspin that would have resulted in the sellers removing themselves from the contract. The lesson here: Shop your mortgages, but ask the right questions—and work with a knowledgeable agent who can navigate this delicate space.

For great service from a local Cincinnati lender, call Huntington Bank’s Matt Miller at 513-770-2060, email matthew.miller@huntington.com. He has the team behind him to service you for physician loans and more!