How do the bank loans work on home renovation TV shows?
April 22, 2018 5:39 PM   Subscribe

I've seen a number of episodes of House Hunters Renovation, and you'll frequently see a couple say their budget is "$500k total" and they'll buy a $425k house and have $75k "left over" for renovation work. What's the structure of home loans that would make this kind of deal work for the average home buyer? I've never heard of a bank giving out loans that included a big buffer over the appraisal/asking price to cover renovations, so how do people do it?

I don't understand where the money comes from, because normally banks only give you a mortgage for at or below what the house is appraised for. If you buy a $425k house, you'll want to have 20% down as cash, or take out a 2nd mortgage to cover that, then the first mortgage is 80% of the value.

Are they getting construction loans? (usually at higher rates than HELOCs right?) Are they using HELOCs? Are they holding back money made on an earlier sale of a previous home? How do normal people afford these? Also, where do they get the idea of a "$500k total budget" in the first place? Is it a mortgage you qualify for plus HELOC plus cash to make that number? How does one calculate such a number?
posted by mathowie to Home & Garden (17 answers total) 1 user marked this as a favorite
Wait -- do you think the reality show portrays real-life ordinary bank practices, and the show doesn't do something to make it happen -- like guarantee the loan or kick in a bunch of money or whatever? I've never seen this show, but I would never assume it's just a normal procedure and the reality show just happens to film it as is without being involved in the finances. It's to their advantage to have a certain budget to make the show worth watching.
posted by flourpot at 5:46 PM on April 22, 2018 [1 favorite]

Response by poster: These shows are notoriously low budget, they would never kick in big money to actual construction projects.
posted by mathowie at 5:48 PM on April 22, 2018 [6 favorites]

Eh, HGTV is owned by Discovery Inc. It's not clear in these cases who decides what's worth what when the show must go on. (Also are you sure there isn't money from companies whose furniture or other commodities are basically product placement/ implicit ads?)
posted by flourpot at 5:50 PM on April 22, 2018

When we bought our second house, we put it that way too. But we had a down payment worth over 45% of the house.

So, even though we made it sound like we were borrowing money to cover the cost of a new roof, really what we meant was that we borrowed more than we would have if we’d emptied out house account. In our case we had actual cash in the bank because we had spent a half a year in an apartment, but it could easily have been that we were moving the equity in our first house fairly directly to the purchase of the second - in which case borrowing more would have landed cash in our account that hadn’t been there the week before.
posted by warriorqueen at 5:53 PM on April 22, 2018 [6 favorites]

Best answer: Here's a Quora answer (sorry!) talking about the certain kind of mortgage that you can get for a fixer but those are for pretty small potatoes stuff. You might want to Google terms like "renovation spending" Sometimes people get pre-approved for a certain mortgage amount based on their income and then go searching for and buy a house that is worth less than that, make up the difference themselves if they're flippers or find something that has a low appraisal value in a heating up market. And the show fudges the numbers and glosses it like "they got a mortgage." Here's an article from Mcleans talking about how this is changing the economic of property in Canada. Here's the "money quote"
A Bank of Canada report two years ago found an average of $8 billion in annual renovation spending between 1999 and 2010 was financed through debt, including loans borrowed against the existing value of real estate through home equity lines of credit, or HELOCs. The Houzz survey found that a growing number of Canadians borrow to pay for their renos, with 34 per cent saying they would take out a line of credit in 2013, compared to 14 per cent a year earlier.
posted by jessamyn at 5:57 PM on April 22, 2018 [1 favorite]

You don't have to use all of your money towards a house. 20% down to avoid pmi, borrow the rest, then whatever else you have saved personally can go for whatever, or however else the math works out. It's also "reality" tv, where it's healthier to just assume it's 100% lies.
posted by TheAdamist at 5:57 PM on April 22, 2018 [2 favorites]

I bought my first house with a 203(k) loan that covered purchase and renovations.
posted by The Deej at 5:59 PM on April 22, 2018 [5 favorites]

Best answer: On those HGTV renovation shows, generally the people already have to be in contract/own the home they're going to renovate - the home shopping part of almost always fake. So the budget is presumably done a lot of different ways depending on the person, and they had already made their budget plans before the show gets involved.
posted by brainmouse at 6:04 PM on April 22, 2018 [7 favorites]

Best answer: We recently looked at purchasing a home that was almost $200,000 under market, because it would have needed around $100,000 in upgrades. (It had no A/C, in Chicago, which is not good. And the basement needed to be excavated another two to three feet, and those two things alone would have been around $60,000 to $80,000. It was a farmhouse built in like 1899 and well-maintained but definitely needed some quality of life updates and some safety updates -- the stairs were waiting to murder someone.)

There were various options, including FHA HomeStyle loans and FHA 203(k) loans, which both provide for renovation; some banks also offered a sort-of rolled-together HELOC and mortgage. The idea was generally that this $100,000 of renovation would add at least that much in value to the house (probably double that in the case of this house), so it's a good deal for the bank which now holds a mortgage on a house worth much more, and it's a good deal for the homeowner who instantly increases their equity with the renovations, and it's a good deal for the town, who get the bump in property taxes from the increased value. They had a whole variety of ways to work out the specifics of the purchase legally, depending on whether you qualified for federal programs etc., but as a practical matter the bank was looking at the price of the house plus the cost of the intended renovation as the "mortgage" they'd be giving you (whether it was all one mortgage, or a mortgage + HELOC, or what). So the house was on the market for about $350,000; the bank was treating it as a $450,000 purchase price for the purposes of assessing our ability to qualify for the mortgage, which would include the renovation money in some form. The better deals required you to have written estimates from contractors and an actual plan for renovation, not just "yeah we need an extra $100k to fix this place up." (The less-good deals just gave you a mortgage and an immediate second mortgage or HELOC for the renovation cash, which you can basically do regardless.)

Anyway, we didn't buy it, but it was interesting to learn about this whole mortgage + renovation loan world we hadn't known about. And you are basically looking at properties that are dramatically under market where the underlying house is solid and some renovations will bring them up to market value. If the house is shitty, there will be contractors willing to buy and tear down. And if the market isn't strong, there's no real upside for the bank, so I believe these are much more common in more intense markets.

(But yeah, HGTV shows are fudging about the buying process. My parents' house got solicited to be on a House Hunters show as one of the houses someone was "looking at" -- when my parents already lived there! -- because it has a complete 1950s diner in the basement, because the last owner was a crazy person. HGTV had noticed the insane diner when it was on the market, when my parents bought it, and HGTV solicited them about six months after purchase. My parents didn't do it, but it would have been cool!)
posted by Eyebrows McGee at 7:09 PM on April 22, 2018 [17 favorites]

Could be the kind of loan described by Eyebrows, could simply be that they're not putting every dime they have into the down payment. If I have $200K in cash, I could buy a million-dollar house with that at 20% down, or I could buy a $500,000 house ($100K down payment to be at 20%) + $100K worth of renos. The easiest time to do renovations is before moving in, so you might plan to do this even if you're not flip-minded, just assuming that you'll be happier with "enough" house fixed up to your specifications than with "a lot of" house and only minor work done.
posted by praemunire at 9:13 PM on April 22, 2018 [1 favorite]

When we bought our house, we saw a few homes we could have bought, but it would have drained our savings almost completely, so we did not do it, as others have pointed out. We wanted to be sure we had enough for small renos if needed, and new furniture, etc.
posted by pazazygeek at 9:20 PM on April 22, 2018

There are also other sources of funds towards a budget than a bank or lending company. When we were buying our first home, my in-laws wanted to give/contribute towards the purchase about $50,000 (Thanks!). For bank reasons, they wanted to see the money in our account for something like 4 successive months prior. What we ended up doing was buying the house on our own putting down 25% and using the in-law cash to renovate the kitchen and a bathroom and replace the boiler. Money is fungible.
posted by AugustWest at 10:03 PM on April 22, 2018 [2 favorites]

We looked at the application to be on an HGTV show when they were filming in our area. The application suggests they are looking for people who have already purchased homes (or were at least under contract) and have cash/financing for renovations already lined up.
posted by ThePinkSuperhero at 6:46 AM on April 23, 2018 [1 favorite]

We've had 2 unrelated friends "buy" houses on House Hunters International and Beachfront Bargain Hunt, respectively, and I am here to confirm that both had their house purchased long before the show. The HHI woman's reno budget came from personal savings, and the BBH couple's reno budget was talked about but the actual reno was never shown because it happened after the show and the money came from vacation rental income.
posted by rada at 8:03 AM on April 23, 2018

My bank, in Canada, would have given me a mortgage that was around 10% more than the purchase price of the home I bought to account for renovations, had I chosen to go that route. It would have required a down payment of a percentage of the higher mortgage price (not the purchase price), as well as a little bit more paperwork giving some sort of details of the renovation plans to the bank so that they had some assurance that the renovations would have increased the value of the property in line with the larger mortgage. I don't get the impression that this is super common in Canada, but neither is it unheard of - my bank person brought it up as one of a couple possible options for renovation funding. Think of it this way: you can take out a mortgage for new construction. Taking out a mortgage for purchase price plus renovations is a similar idea. Mortgage practices in the US are a little bit different than in Canada, however.
posted by eviemath at 11:20 AM on April 23, 2018

I got a mortgage with extra money for renovations. I don't remember all the details of how it worked, but they did send an appraiser in after the renovations to see how much the value had increased. This was in Canada, but so are many of these renovation shows.
posted by If only I had a penguin... at 8:20 PM on April 24, 2018

The one thing I don't believe was addressed in other answers was contingencies in the buying agreement. This might be stretching the limits of legal boundaries, but I've heard of arrangements where the seller's price is agreed upon, if the seller agrees to a $10k kitchen remodel, or something of the sort. So the seller is on the hook for paying contractors or providing those funds, and the buyer gets a mortgage for the sale price but is technically not paying for that part of the remodeling.

It's legally iffy because it's also a way you could provide kickbacks or launder money, for obvious reasons. Not that anyone does shady real estate deals.
posted by mikeh at 6:54 PM on April 25, 2018

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