Ask a Renovation Lender

6a00d8341c630a53ef00e54f29efeb8834-800wi Forget the granite or tile conundrum. The big remodeling question is this: “Where do you get the money?”

Here are some of the remodel finance strategies I’ve seen over the years:

— Sale of stocks
— Cash inheritance from family
— Cash-out refinance
— Sale of elderly parent’s home to pay for remodel, which included a secondary unit for said elderly parent
— Construction loan (based on value of house after upcoming remodel)
— Savings (does anyone save anymore?)
— Credit cards (sad but true)
— Equity line of credit
— Tax return
— Company bonus
— Second mortgage
— Earnings from hit TV show (hey, this is L.A.)

To help you figure out your own financing options, John Sway, a loan guy, may be available to answer questions about getting money for a remodel.

To be accurate, John Sway is more than just a “loan guy.” His title is actually National Renovation Manager at Prospect Mortgage. Based in San Diego, John really knows about renovation lending. He’s been quoted in the L.A. Times (I’ve interviewed him several times over the past decade), Chicago Tribune, the New York Times, and countless national magazines.

Read today’s story on Charles Chang’s Victory and see what smart financing can do for you.

What’s your question for the loan guy?

10 Comments on Ask a Renovation Lender

  1. Kathy Price-Robinson

    Thank you, John, for answering reader questions this week. I really appreciate it, and I’m sure they did too. And if readers have any further questions on a renovation loan, or other kind of loan for home improvement, I’m sure they will email you at
    Again, much appreciated!

  2. John Sway

    You would be better off refinancing with a either a conventional renovation loan or a cash out refinance. An FHA 203k has both up front and monthly mortgage insurance premiums. It sounds like you have enough equity to avoid mortgage insurance.
    The main difference between a cash out refinance and a renovation loan is who is in control of the money allocated for construction. One of the features of a renovation loan is funds control. Construction funds are put into an escrow account and paid to the contractor as work is completed. Whereas funds from a cash out refinance are given to you to spend as you see fit.

  3. Rene

    Hi Mr. Sway,
    I own a craftsman bungalow in LA that was recently renovated (major interior remodel including upgrade of plumbing, electrical, hvac) and would like to refinance in order to begin renovations on the exterior.
    What are the benefits of refinancing via the FHA 203k program vs. a cash-out refinance? My credit and income are good and I have substantial equity in my home.

  4. John Sway

    I am sorry to hear you had a difficult time purchasing your home.
    Unfortunately there is no such thing as a first time homebuyer refinance.
    I suggest you get several quotes from reputable lenders for a no cost refinance. Your up front fees should be limited to a credit report and appraisal since these are thrid party costs. The good news is your loan amount will be based upon the value indicated on your new appraisal.

  5. sheila

    Hi Mr. Sway.
    I own a gorgeous large property outright, purchased (for cash) in the past few months. Although I was approved for a fantastic first-time homebuyer program, and was repeatedly promised the loan (my account exec was supposedly fired because of that), on the day before closing, my loan didn’t fund, because the older structure did not have a working shower/bath.
    The property “as-is” appraised at full purchase price, and the appraiser said that this was common for the area, not a “functional inadequacy,” and the property was clearly worth my (very modest) price, but I guess lenders are not in the business of truly lending money for homes, but rather in flipping loans, and they felt they couldn’t sell the loan immediately, and overruled the appraisal with their unpublicized (even to their own employees!!) “underwriting standards.” I offered to put a shower in as soon as I took possession and have it appraiser-certified, but they said that would be too late, so they left me completely stranded.
    All that to say, I am installiing the shower now, and wondering if I apply for a re-finance, am I stuck with the purchase price (since it was a recent purchase) or can I get a higher independently-appraised value since it is definitely worth more than I paid for it, and it now has a remodeled bathroom, which generally pays off at more than 100% of construction costs? If nothing else, I’d like to get the price of the numerous improvements I’m doing back out of it.
    Also, are there any first-time-homebuyer/moderate income re-fi programs which might apply to a person in my situation? The basic cash-out re-fi is incredibly expensive with roughly $4,000 in up-front expenses (why???) and much higher interest rates than my initial program (and yes, i have good credit), so what would you advise?
    Thanks a lot.

  6. John Sway

    Anne and Erick: Your offer does not apprear to be unreasonable. What I would do in this situation is determine the value of the lot and then subtract the demolition costs. A contractor gave me an estimate of $15,000-$20,000 for the demolition you described.
    The good news is you will not need to sleep in a tent in the front yard if you purchase this house. Construction and renovation financing allow for mortgage payments to be financed during the construction period. In other words, most people live in what we call their departure residence during construction, and finance their mortgage payments on the new home during that time. Very few people can afford to make two mortgage payments every month.

  7. John Sway

    There are several different loan programs available to purchase a home in its as is condition and close escrow within 30-45 days.
    The first is the FHA 203 K program. The loan limit in San Diego is $362,790. The down payment is 3% and this program allows the seller to pay up to 6% of your closing costs.
    The second option is a conventional renovation loan with a loan limit of $417,000 and the opportunity to add a second mortgage up to an additional $500,000. The minimum down payment is 5%.
    The third option is a construction loan with loan amounts up to $5 million. The minimum down payment is 5%. The percentage of down payment require increases as you loan amount increases.
    When you make an offer on the property have your Realtor state you are using renovation financing. You will need to select a contractor and have him give you a cost estimate for the work you want completed. The appraiser will value the property based upon the your contractor’s specification of repairs. You will close escrow prior to any work being completed.
    Renovation financing is an excellent choice for bank owned properties. Make sure to get a home inspection on the property so you know what you are getting yourself into. Good luck.

  8. Anne and Erick Miller

    Mr. Sway,
    We, too, are looking to buy a house that is in foreclosure. The asking price is 550,000 and the house and guest house are in such a state of disrepair (mold, water damage, botched/unsafe remodeling, etc.) that we believe we’d have to tear them down and start over (while living in a tent in the front yard and stress-testing our marriage!) We would like to offer the bank the value of the land (450,000 as of 2005 tax assessment), as we’d have the job of tearing down what stands on the lot. Are we crazy to think a bank would take a drastic underbid on the property? If not, any idea what the cost of demolishing a 1500 sq ft house + 300 sq ft. guest house might be?

  9. John Sway

    Geroge, there are several things you can do to raise your FICO score. I suggest you speak with a competant loan officer and have her pull a credit report and review the best options for you. Your loan officer should also propose several different renovation financing options to best suit your needs. One option is to take out a second mortgage as you mentioned. Currently second mortgages are a couple of percentage points higher than first mortgages. Your loan officer should calculate the blended rate of your first mortgage and the rate on the second mortgage to determine if that is your best option.
    It is impossible to determine what rates are going to do in the future. I suggest you initiate the loan process to determine if you qualify for financing now. This should not cost you more than the cost of a credit report.

  10. George K.

    Mr. Sway: I have a 1,700-square-foot house in Whittier that is worth about $550,000, based on what houses have been selling for nearby.I have a mortgage of $410,000 at 6%. I want to add a second-story master suite, which I figure will cost about $75,000. My question is about my credit score, which is pretty low, about 640. I wonder if I should pay down a few credit cards and try to raise my score before I get a second mortgage to finance the remodel. But I’m afraid loan rates will go up in the meantime, and then I’ll be worse off even with a lower FICO score. Any advice?

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