Buying a place that needs some upgrades is often a way to get a deal in New York City. Fully updated apartments are pricier—and get snapped up quickly, and are more prevalent in today's market. Pandemic supply chain issues, which have created backlogs for renovation materials and new appliance, enhance the appeal of move-in ready apartments.
But if you have the nerve, buying a place that needs work and putting money into a property is another path to ownership, with the benefit of creating a custom, personalized space and potentially increasing its value.
If this is the route you're considering, you may be looking into borrowing money not only for the purchase but also for the subsequent renovation. Unfortunately, acquisition renovation loans—where the mortgage and renovation loan is rolled into one—are difficult to come by in NYC but you still have options. The funds you can access will depend on how much you plan to borrow, your credit, and the type of property you're buying.
[Editor's note: An earlier version of this post was published in October 2021. We are presenting it again as part of our winter Best of Brick week.]
Mortgages with renovation loans
For a lender, there are bigger risks associated with lending money for a mortgage that includes a renovation loan—for example, what happens if you run out of money in the middle of a construction project? In order for the bank to get their money back on a property you've purchased and started renovating, they would have to take over the project. That's not the outcome they want.
Because the risks are high with these types of loans, Melissa Cohn, executive mortgage banker at William Raveis Mortgage, says banks are more inclined to lend to jumbo borrowers—those who qualify for purchase and renovation loans above the conforming loan limit of $822,375. So if you are able to take out a loan of a million or more, you'll typically have more options.
"There are not a lot of lenders who are willing to do this for conforming loan amounts," Cohn says. However she points out there are some programs like the HomeStyle Renovation Mortgage—a Fannie Mae product—that will allow you to buy and use additional funds to finance appliances, flooring, paint, and other interior upgrades. There are some hoops to jump through—for example, have to go through counseling with the Department of Housing and Urban Development (HUD)—but if you have a lower credit score, this might be good route.
There's also the Federal Housing Administration Limited 203(k) Mortgage, which has a similar format to the HomeStyle reno loan. It's not available for co-ops and if you're buying a condo that needs some work, as with all Fannie Mae products, the building needs HUD approval.
But "there are virtually no condo buildings that have HUD approval in New York City," Cohn says. It is possible to apply for spot loan approval—where HUD approval is given for a single apartment rather than the whole building—and the loan process is then opened up to people wanting to buy condos. However, Cohn says spot approval is rarely given in New York City.
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That's why you'll probably only be able to access this loan if you want to buy and renovate a single family home and as Cohn points out, they are conforming loans which means the loan amount will not exceed $822,375 for a single unit—and remember, that's a figure that includes the purchase and the renovation.
However, Pat Lavell, vice president of mortgage lending at Guaranteed Rate, says while the limits on the size and scope of the loan mean its use is probably restricted to those planning to buy and renovate in the outer boroughs, "for some of Staten Island, the Bronx, Queens and even parts of Brooklyn, the loan amounts may work." He's also expecting the loan limit to increase by 14 percent to $937,500, in 2022.
The product allows you to finance up to 96.5 percent of the combined purchase price and renovation costs up to the conforming loan limits, which actually rise if you are buying a property with multiple apartments, say a two family or a multi-family building.
Lavell points out that with FHA loans, you have to have a budget and plan from a licensed general contractor, a HUD Consultant needs to approve the plan and then you'd get follow ups as the project continued.
A similar New York State product is the RemodelNY program, which provides financing to qualified first time buyers where the purchase and renovation are rolled into one mortgage.
Accessing a HELOC
Another option is home equity line of credit, known as a HELOC. This product allows you to borrow against your property and functions more like a credit card. You pay interest on the loan and only pay when you start using the line of credit.
With a HELOC, you're borrowing against the equity in your home so it's often popular with owners who have had their place for a while, built up equity over the years, and want to borrow against that. However, it can still work if you need to renovate immediately or within months of closing. In New York City, most buyers put at least 20 percent down and in order to take advantage of the best rate possible you may put even more down. Cohn says once you close, there are banks that will give you home equity loans up to 95 percent of the value of the property. "It's only of the 'as is' value, but it's certainly letting you tap into some money that can be used for renovations," she says.
One caveat is that a lot of banks aren't comfortable offering these products for the renovation of apartments. Co-ops have financing requirements and with Fannie Mae products under $822,375, the buildings needs to have HUD approval and, as mentioned, few condos in the city have it.
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