One of the big problems with the housing market today is the lack of supply. After the 2008 housing collapse, we didn’t build enough homes to keep up with population growth. As a result, the houses we find on the market oftentimes are just not it. And it can feel hard to justify paying top dollar for a home that doesn’t fit the bill.

The fact of the matter is, much of the US housing stock was built for a very different era. The average age of a US home is around 40 years old. In some areas, like in the Northeast, that number can be more like 50 years old.

You can find homes in attractive locations with really good “bones”, but they might need a substantial renovation. In other markets, you might not find anything to your liking. In response, more and more buyers are deciding that it’s the right choice is to start from scratch.

While building ground up or completing a significant home renovation are certainly more ambitious choices, they can also be how many enterprising homeowners unlock significant value.

If you think this is the journey for you but you don’t want to go it alone, Stuga can be your concierge. Start by creating a home profile for you home, and leave the rest to us.

Is it right for me?

The desire to build from scratch or undergo a big renovation comes from a different place than buying existing home. But beyond a desire to channel your inner architect, how do you know if its right for you?

Self-Reflection - There’s no getting around it - ground-up construction or substantial renovation projects are complicated and time consuming. There’s more uncertainty with regard to the costs and the process compared to buying an existing residence. But for some of us, that can sound… exciting.

The process for building or renovating a home starts with self-reflection: Are you the type of person who likes to learn and make decisions? More practically, are you in a position in your life where you can take on the added stress and time commitment that the project will be require? If the answer to these questions is “yes”, then a construction or renovation project might be a good fit.

Preparation, Plans (and Paperwork) - The preparation and planning for your project should start a number of months, and maybe even a year or two, before the project commences. All along the way, you’ll be negotiating a lot of contracts, filling out a lot of forms, and making a lot of decisions. It's more work, but there’s also more reward.

Start with a Budget - Everything starts with the budget. What’s a realistic amount you can afford? Part of assessing this can emerge from the process of getting a mortgage for your project: the bank or mortgage company can help qualify you for a loan amount.

Unfortunately, some banks and mortgage companies will lend you more money than you can afford, so it’s critical to have a thorough, independent understanding of what you can comfortably afford.

How would this work financially?

There’s two steps to making this work financially:

First, as mentioned above, everything starts with a budget. You need to align your plans with what you can truly afford based on a thorough assessment.

Second, you need to work with a qualified loan officer who can help you transform your plans and your budget into the right mortgage product to make your dream a reality.

Below, we’ll review some of the key mortgage products you can use to finance your home renovation or construction project.

Renovation Financing

FHA 203K Renovation Loan: An FHA 203k loan is a type of FHA mortgage that allows the borrower to include the cost of renovating or repairing a property in the loaned amount.

A borrower can take out a single mortgage to cover (1) the cost of acquiring the property and (2) the cost of upgrading, improving, or repairing the property.

They are limited to primary residences (not second homes or investment properties). But they can be used to construct an Accessory Dwelling Unit (ADU) on the property.

There are two types of FHA 203k loans: Limited and Standard.

• Limited: Limited limited to modest, non-structural home improvements (e.g., a fresh coat of paint, new appliances). They are capped at $35,000 total.
• Standard: For more substantial renovation projects. They can be used for structural and/or functional improvements up to the FHA loan limits for your area. Click to learn more.

Conventional Renovation Loans: Most loans in the US are conventional loans. Backed by government sponsored enterprises (GSEs known as Fannie and Freddie, borrowers access these programs though their mortgage lender.

Both Fannie and Freddie offer renovation loan programs, Fannie Mae’s HomeStyle and Freddie Mac’s CHOICERenovation, respectively.

These loans allow a borrower to take out a single mortgage to cover (1) the cost of acquiring the property and (2) the cost of upgrading, improving, or repairing the property.

Like FHA 203k, they can be used to add an Accessory Dwelling Unit (ADU) to an existing property. But unlike FHA loans, Fannie’s HomeStyle and Freddie’s CHOICE can both be used for second homes and investment properties.

Click here to learn more about conventional renovation loans.

Construction Financing

One-Time Close Construction Loans: Construction loans used to require intense documentation, high interest rates, and large down payments. They also used to involve more expense and hassle by requiring multiple approvals. Today, one-time close new construction loans are helping to make it easier than ever to to get a new construction project started - and to keep the project moving.

A one-time close new construction loan is a single loan that’s structured into two phases: the construction phase and the permanent loan or mortgage phase. The construction portion is short-term financing that is modified into permanent financing upon completion of the project.

The borrower doesn’t have to pay for the build and then get a mortgage. Instead, the mortgage pays for the build. The cost of acquiring the land can be included in the loan amount as well.

One approval and one closing means less hassle and only having to cover one set of closing costs. During the build period, borrowers can pay interest-only payments. Once the loan is complete, borrowers can modify down to secure a lower interest rate if the market changes or stay locked in with their existing interest rate no matter how the market moves.

Click here to learn more about one-time close new construction loans.

Stuga specializes in these types of loans and the network of partners to make sure you get the right product along with ongoing support.

What else should I be thinking about?

The best thing to do early on is to familiarize yourself with the key process steps and the key players involved in a construction or renovation project.

• Budget: Budget setting can emerge from the process of getting a mortgage for your project. That loan amount will include the funds needed to buy the materials and pay for the labor to complete the project. The amount of cash you put into it will work just like it would for a down payment on buying an existing home.
• Here are a few other budget tips:
  • Reserve for cost overruns: Given that construction or renovation projects often have cost overruns, it’s also a good idea to have a reserve of funds set aside to mitigate this risk.
  • Don’t overlook certain costs: Some non-obvious costs can get overlooked in budget setting - things like landscaping improvements, lawn and garden equipment, furnishings, and the like.
  • Budget time to shop: Make sure you allow yourself time to comparison shop. Get bids from at least three general contractors. Be involved in the decisions around materials, fixtures, appliances, etc.

With Stuga, you can assess your true buying power, get a total cost estimate, then get qualified for the best mortgage product for your particular project.

• Lot Selection: For ground-up construction projects, before moving forward with building plans and selecting contractors, you need to buy the lot. A good real estate agent will help you find a lot that suits your specifications. You’ll then need to work to understand local land use regulations (zoning and building codes). Unimproved land lots require additional investigations (drainage, soil condition) and infrastructure investments (clearing trees, roads/driveways, etc.,). You’ll likely need to have a survey done on the lot to know where the structure can be built
• Building Plans: The next step is the development of plans. For small-scale renovation projects, this can come in the form of a list of improvements you want to make to the property and you’ll secure bids from contractors or sub-contractors. For ground-up construction, you have a major choice to make: do you want to use stock plans from an online catalogue, or do you want to engage a licensed architect to develop the plans for a custom designed home? The latter can be much more expensive and time-consuming, but it can enable you to truly get the home of your dreams.
• Experts & Contractors: You're now ready to engage the team to help you build. Depending on the scale an scope of your renovation plans, you may only require the services of a sub-contractor or two. For more substantial renovations, you’ll need to select a general contractor unless you plan to GC the project yourself. Here are the key players on the team you’ll need to assemble:
  • Loan Officer: A good mortgage loan officer should function as your financial advisor for the whole project: they should partner with you on setting a budget and making sure your plans are realistic relative to your budget. And of course they should help you get the loan.
  • Builder: Once a budget and plans are in place, most homeowners then select a general contractor to oversee the project end-to-end. The GC will hire quality sub-contractors and ensure that the home is built or renovated according to the plans. They’ll also order and manage delivery of all building materials and manage permitting and inspections.
  • Others:
    • Surveyor: For ground-up construction projects as well as certain substantial renovation projects, you’ll need to engage the services of a surveyor who will help you determine the location of structures, limits on structures, assess environmental factors, and determine boundaries.
    • Excavator: An excavator will help you clear trees and prepare the site for the build. You can either have your builder/general contractor select and manage the excavation work or engage one yourself after the survey work’s been completed.
    • Architect and/or Designer: If you opt for a customized home, you’ll need to work with an architect to develop your building plans. Some customers choose to have a home designer work with them to choose building plans from an online catalogue and perhaps make minor adjustments.
    • Attorney: Some states, like New York or Massachusetts, require an attorney be part of a residential real estate closing transaction. But beyond that, you may also wish to consult a local land use attorney to ensure that your plans are compliant with all local zoning and land use regulations.

How can Stuga help me?

If you think that you want to build from scratch or fix-up a home, Stuga can guide you every step of the way and for roughly the same costs as figuring it out alone.

On top of helping you find the best mortgage for your purchase, we'll also help you vet a contractor and provide you with useful insights throughout your home search.