Bundling Home Financing and Remodeling Mortgage Loans
June, 2000 by Jim Woodard With home prices continuing to rise in most markets, combined with a minimal inventory of available offerings, buyers are becoming more flexible and settling for a "second best" selection in the home they purchase. However, smart buyers often turn that second best home into a residence that meets their "dream home" criteria by contracting to make changes or additions to a selected home at the time of purchase. And there is now a special mortgage loan available that will cover expenses for both the home purchase and custom remodeling work. If you find a home that appears to be ideal, but you need another bedroom or bath or a larger kitchen to accommodate your family's needs, you can now finance everything - purchase and remodeling work - with one HomeStyle Standard Mortgage Loan, structured by Fannie Mae (Federal National Mortgage Association). Fannie Mae doesn't lend money to consumers. It's the major buyer of existing mortgages (a secondary buyer) - a federally chartered stockholder-owned corporation. They have a lot of clout with individual mortgage lenders, and play a major role in the type of mortgages that are available to consumers for home buying or refinancing. Fannie Mae's HomeStyle loan can finance the purchase of a home and needed improvements in one swoop. And there's virtually no limit as to the type of improvements the buyer can finance. The loan covers 95 percent of the purchase price on a single-unit owner-occupied home plus cost of improvements. In other words, 95 percent of the cost of a remodeling or improvement project can be covered in the same loan that is financing 95 percent of the purchase price. It should be noted, however, that the renovation costs can't exceed 50 percent of the value of the home. A big advantage of the loan is related to taxes. Since the purchase price and remodeling funds are packaged together in the same loan, the owner can deduct interest payments for both on his income tax. This special loan is available to people of all income levels and allows the homeowner to make a variety of smaller improvements, such as painting and carpeting, in addition to major remodeling projects. The loan can apply to homes up to $252,700 for a single-family home, and as high as $485,800 for a four-unit structure. So far, the plan seems to be especially appealing to seniors and women. They tend to feel more vulnerable when it comes to home improvement and remodeling projects. But with these loans, the contractors must be licensed and insured, and inspectors must check all phases of work before the funds are paid out. In some cases, these loans can be combined with Fannie Mae's HomeStyle Community Mortgage. This gives low- to moderate-income homebuyers even more accessibility to affordable homes. Qualified buyers with these loans can obtain a home with a down payment as low as 3 percent. And closing cost assistance can be obtained through gifts, grants, or other types of loans. There are other types of government programs now available for homebuyers who need to make repairs to their property. The Federal Housing Authority 203(k) Rehabilitation Mortgage is an example. It covers both the purchase of the home and cost of improvements. An advantage of this loan is that it's available to persons with less-than-perfect credit and requires only 3 to 5 percent down payment. The best first-step is to discuss possibilities with one or several lenders. Learn as much as you can about each mortgage loan you think might meet your personal needs before making a final selection. You'll be living with, and paying for, that loan for a long time. * * * Private Mortgage Insurance Promo In some respects, the communications age is making it more difficult for persons seeking viable information about purchasing a new home. More information, and more media, is available today than ever before. But often that media is used by special interest groups to attract consumers into their camp. An example is the current promotional campaign by the Mortgage Insurance Companies of America (MICA) who want more homebuyers to use mortgage insurance. Mortgage insurance is bought and paid for by homebuyers, but the coverage protects the interests of the lender, not the buyer. However, it does allow the lender to offer financing for more than 80 percent of the property's sales price. It can bring the cash down payment down to 5 or 10 percent of the property's value. That's the good news. The bad news is it's very expensive insurance coverage, requiring a substantial upfront payment and continuing surcharges with the monthly payments. In most cases, it's far better to save for a 20 percent down payment before purchasing a home, or go for a government-backed (e.g., FHA) mortgage loan that also offers minimal down payment but without the private mortgage insurance. The current promotional campaign by MICA is designed to "educate the public about the benefits of private mortgage insurance,' according to the association's executive vice president. But it's probably targeted at legislators as much as consumers. They want more people to buy mortgage insurance from their members, and they want those legislators to go easy on them with restrictive regulations. "Private mortgage insurance allows some people to buy homes as much as 10 years earlier than they would have been able to," it was stated in a release from MICA. "For some families, saving up for a 20 percent down payment can take as much as 10 years. Private mortgage insurance allows consumers to buy homes for a much smaller down payment." The campaign features print, radio and on-line ads that explain the role and benefits of private mortgage insurance. The ads are appearing in Time, Newsweek, U.S. News and World Report, Wall Street Journal and other national media. The message they deliver is basically true, but (like other special interest campaigns) it tells only the positive side of using their members' product. It doesn't mention the cost or viable alternatives available to today's homebuyers. | 
