I am not a lender of money. I am a builder of dreams. Dream renovations, dream homes, to be more precise. But often, in order for our clients to be able to realize their dreams, they need more money than they have on hand. The answer I usually get from perspective clients when asked how they plan to pay for their project, is that they will simply get a construction loan.

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1. Construction Loans Explained

Over the years, having met with over a thousand home owners, I have come to learn that a leading misconception about remodeling (and there are so many!! Thanks HGTV!!) is how construction loans work. This is not meant to be a financial advice blog. Go talk to your lender or financial planner for advice. But what I am happy to share is what I see clients go through time and time again. So here a few heads-up items to consider:

2. Qualifications

To get a construction loan, there are two major qualifications that need to be met: you and/or your spouse/partner need to qualify in terms of your income and current savings, and: your house has to qualify as a “good investment” for the bank.

3. After Repair Value

This second part is where people get tripped up, and its where deals die and early death. Once you have an agreed upon plan and pricing with your design and build team, the bank’s real estate appraiser will determine the After Repair Value of your home. This is the part about your home “qualifying”.

4. Equity

I have never seen a deal happen where the homeowner does not begin with at least 50% equity in their home as-is (example: home is worth $400k as-is, and you owe $200k).

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5. How Remodeling Increases Value

Your home’s value will increase, per the appraiser’s report, mostly based upon adding more heated and cooled space. I rarely see the needle budge very much if the project is simply interior renovations. And that gorgeous new deck or screened porch? Nada for increasing value.

Your custom remodeling and addition, when all is calculated, will likely cost more on per square foot basis than the value it brings to the appraiser’s report. That is why Item #3 is so critical. You need a whole bunch of equity going into it!

At Alair Homes Decatur, we’ll work with you to make remodeling cost effective and financially feasible because a great home renovation is one you can afford. Contact us to discuss your project during a complimentary, no obligation consultation.

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