As with all my other blogs, I can only speak from MY experience. So here goes...
When my husband and I decided that the "Foreclosure of Our Dreams" was the home we wanted to have, we immediately called a lender that was recommended by our realtor and asked about our options. What we settled on was a Renovation Loan. Financing products are changing all the time so you need to be sure to do some shopping around when your time comes. Having someone you know personally recommend someone is the best way to go, in my book. It's more personal that way and it makes it easier to ask questions and you feel like someone has your back.
Our reno loan was totally different than any other type of financing we have ever had in the past. There were all sorts of rules and conditions and I am not opposed to those things, but, some were harder to understand than others. Here are the ones that stand out the most:
RULE: Only a licensed contractor could do the work. Now, we didn't oppose this rule at all! OF COURSE we want a licensed contractor. HOWEVER, what this rule also means is we could NOT "pitch in" on any demo or any other fixing of things because HE had to do the work. So, if we wanted to save money and do some things ourselves, we could not. The bank's view: trying to make sure that quality work was done everywhere so that they would get their money back if we bailed.
RULE: You need a detailed estimate of what you want to have done from the contractor up front. Seems pretty easy, right? You get a contractor, you walk him (or her) around the home and boom an estimate is given! NOPE. A DETAILED estimate means, not only a labor estimate, but actual cost of supplies and items that you will need, and I don't just mean nails and paint! We had to quickly pick out all the fixtures, appliances--everything--we were going to want, and get the contractor the prices for those items. It seems like it would be easy, but it is NOT. I don't know about you, but sometimes it takes me a hot minute to figure out what I want for some items! Others were easy, but, when I had to pick out bathroom vanities, counter tops, cabinets in the kitchen, light fixtures, tile, flooring....well you get the idea. AND it had to be done BEFORE the bank for sure approved everything! After we gave the contractor our list, he took those items and his labor to install everything and had to give that list to the bank as well. It was scary to make fast choices and it was hard. Some things I had no idea that we would need, etc. AND, for us, all the things we wanted done were OVER the budget that we wanted to borrow from the bank, so then we had to decide which jobs got nixed, which we paid for out of pocket...just so many decisions is so little time!
RULE: You need extra in the bank (about 10% of your loans value) of cash for overages. For the bank, this protects them if you run into an issue, you won't ditch because you don't have the money to cover the issue. We had some cash in our account to cover this. It seems strange to have to have money so you can get a loan, but, that is how this one worked. So, the idea of doing a renovation to save money isn't necessarily the truth. You may end up with a better value in the end, but, sometimes you gotta spend the money to have the value, too.
RULE: The space must be lived in as your primary residence in 60 days. Now, this rule isn't one where you will be arrested if you aren't in the house fully by then, but, it does mean you can't use this particular loan or house for a flip or rental. This gives the bank even more security that you will care and STAY and not run out on the house mid-reno. (And, in our case, it was the selling bank that had this rule because it was already a home that someone left). It's hard enough at times for a bank to sell a home that someone has left let alone a half completed mess of a home!
RULE: All money draws go through the contractor AFTER some work has been done and APPROVED by an appraiser. What this means is, you need to hope that your contractor has easy access to cash and/or supplies ahead of time because he won't get any money from the loan/bank until some of the renovation has been done and checked by the bank's approved appraiser. Which is sort of like working for nothing up front. Thankfully we had a contractor who had dealt with this before so he knew what to expect and was fine with it, but, be sure to ask your contractor these questions from the beginning, so he doesn't give up and quit in the middle of the job either. Most contractors don't expect up front payment on things anyway, but if they are strapped because of other jobs, etc, that particular contractor may not be for you.
There were a lot of other things that came up with a foreclosed home that didn't even have to deal with the reno loan, but, did cost in time and money from the loan we didn't expect as well. A "fixer upper" is a home with a lot of strings...like a relationship with a person who has a lot of "baggage" to deal with! You really have to put your "unconditional love" into it to get passed all the issues at times. For me, I wouldn't trade my home for anything...but sometimes, there is too much baggage to deal with and it's better to end things before they really begin!