Home additions such as porches, garages, kitchen expansions and additional bedrooms or even an additional floor all add square footage and value to a home. They can make the house you occupy more liveable and prevent the need to shop for a larger property. Funding your extension can be the toughest part, but with a home loan to cover the expenses, the major roadblock to more space may be removed.
Call in a few contractors to determine the cost of your addition. Describe what you would like to accomplish and request an estimate from each candidate. Use the highest estimate then add 10 percent as your guide for how much you will need to borrow.
Weigh your loan options to determine which you will be able to obtain, which is the most affordable and which will fit your budget and circumstances best. Some of the loans available to you may include home equity loans, home equity lines of credit, mortgage refinancing and personal loans. Each has its positives and negatives and should be considered on its merits. Home equity loans are granted against the value of your home and use your home as collateral. Home equity lines of credit are also opened against the value of your home but provide only as much as you need when you need it without a large lump sum to repay. A refinanced mortgage can be taken for more than the value of the home to include funds for additions, while personal loans are unsecured and based on your credit score.
Engage in a preapproval process with the lender of your choice. Doing so will allow you to get an idea about how much you will be able to borrow and will reveal the loan options open to you. In addition, a preapproval at one bank can be taken to another for a little loan shopping. Finding better interest rates, a shorter term or fewer points can result in a much lower payment and a much more affordable home addition.
Check which federal programs or federally backed financing options are available to you. FHA's 203k Mortgage program is designed for buyers purchasing a home in need of repair or a home with the intent of performing a rehabilitation or constructing a legal addition. The program can also be used to combine additions and upgrades with the refinance an existing loan FHA's Energy Efficient Mortgage program provides a loan for the amount of the house or the refinance plus the cost of upgrades that will improve the energy efficiency of the home and reduce the annual energy costs associated with it. FHA loans are available through approved lenders in all 50 states.
Apply for a B or C home loan if your credit score is not the best or if your income to debt ratio does not qualify you for a standard home loan. If you decide to go this route,, read the specific terms and conditions carefully since they vary from one lender to the next and may contain all types of variables. B and C loans provide borrowers with less than perfect credit with the loan they need while offsetting the added risk for the lender with interest rates that are significantly higher than the norm. In the end, you get the loan you want and the bank gets more return on the investment. Weigh the importance of the addition against the cost of the loan before committing.
- If you plan to do the work yourself, calculate an estimated cost based on materials and equipment then add about 30 percent to cover incidentals and unexpected costs which always find their way into the mix. (Reference 2)
- A low credit score or poor income to debt ratio may prevent you from getting the loan you need and the home addition you want. As a rule, lenders will only lend up to 80 percent of the total value of a home as a home equity loan or line of credit. For second mortgages lenders typically require that your total debt is no more than 42 percent of your income per month.
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