Can You Get A Home Loan for More Than the Purchase Price?

For many first-time home buyers, their closing papers end a long and often grueling process. However, for many homebuyers, this is just the beginning. Many new homeowners soon learn they need more than anticipated to make necessary renovations, unexpected repairs, or upgrades to suit their vision. However, for some, there is a lack of affordable homes in highly competitive markets where homebuyers are involved in multiple-bidder campaigns, which results in prices even exceeding appraisal values. This sparks a significant question: Can you get a mortgage for more than the purchase price?

This blog will give the scenarios that can get you a mortgage more than the home's purchase price. We will also look into loan options to assist you in realizing your objectives and all the factors you should consider before getting into a bigger loan.

Why Would You Need a Mortgage for More Than the Purchase Price?

The conditions or scenarios wherein the buyer can achieve more loan than the purchase price of the house include:

1.      Home Improvements and Repairs

All houses need a little TLC- Tender Loving Care to make them feel like home, whether it's a new kitchen, updated baths, or basic repairs. Many buyers would like to roll these costs into their mortgage instead of taking personal loans or credit lines after the closing. The most frequently needed renovations are:

·         Safety or Structural Repairs:

You will often need to purchase a fixer-upper that requires some safety or structural repairs before moving in.

·         Energy-Efficiency Upgrades:

Window replacement, insulation, and appliance upgrades can save on utilities down the line.

·         Cosmetic Improvements:

Just fresh paint, or everything like the floors, cabinetry, and lighting.

To ease the buyers, lenders have specific mortgages above the paid price at the initial purchase. This way the borrower can fund repairs or renovations immediately.

2.      Bidding in a Seller's Market

For example, in some hot markets where the level of demand for a house is high and the level of inventory low, multiple bidders in these markets are likely to overpay. Buyers then tend to seek to get that desired house by accepting higher mortgages. Sometimes, lenders will provide what are referred to as jumbo loans, or other loan options, to enable buyers to borrow more money than they normally qualify for, usually with stiffer financial requirements.

Loan Options for Mortgages Over the Purchase PriceIf you are looking for financing beyond the purchase price, several loan programs will help you there. Here are some of the most popular ones:

FHA 203(k) LoanThe FHA 203(k) loan is a program-supported loan by the government specifically designed to encourage buyers to include the cost of home improvement in the financing of the home. What is it?

·         Eligibility Conditions:

Generally, applicants should have a minimum credit score of 620 and be prepared to put up with at least 3.5% in down payment.

·         Limitations and Restrictions of Loan:

The FHA 203(k) loan is not a high-end upgrade. However, it can offer financing up to $35,000 for repairs which the lender or the borrower considers as necessary or minor improvements.

·         Project Supervision:

For major reconstruction, the FHA requires engaging a qualified 203(k) consultant to oversee the project and ensure that it improves the property.The main advantage of the FHA 203(k) is that it allows buyers to finance their home's purchase and repair under one mortgage, which they save from securing separate loans after closing.

  HomeStyle Loan

HomeStyle loan is another. It has relatively greater flexibility when it comes to the type of improvements and repairs covered. Key details include:

·         Down Payment and Requirements:

Typically, at least 5% down and a solid credit profile.

·         Project Planning:

The buyer must present a detailed renovation plan prepared by a licensed contractor to be qualified.

·         Loans Amounts:

This loan actually enables a more extensive renovation budget than the FHA 203(k). However, lenders will still determine if the renovations should have a probable increase in property value.

Home Equity Loans or HELOCsHomeowners who purchase a home for less than its appraised value, or who have owned it long enough to have acquired an appreciable amount of home equity, can borrow some or all of that equity in a home equity loan, also known as a HELOC, or Home Equity Line of Credit. Here's how it works:

·         Equity Required:

Lenders determine how much equity you have available to borrow by making a comparison of the current market value of your home versus what you owe on the property.

·         Best Use Cases:

Home equity loans are best for buyers who look forward to financing essential repairs that increase the value of the property such as roof replacements or structural fixes.

·         Longer Terms:

Since home equity loans can have a repayment period similar to a mortgage, you essentially stretch out your debt term.

Home equity loans are thus a savvy way of funding repairs and renovations if the property has appreciated since the purchase.

Should you borrow a higher loan?The decision to get yourself a mortgage that surpasses the selling price is a big commitment, and thus you have to weigh the pros and cons well. Here are the factors:

Pros

You will have instant access to the funds needed for the upgrades or renovations - right from the beginning.

a)      Convenience of One Loan:

It is simple to fund your home purchase and renovations through one loan. This translates to fewer payments and lower interest as opposed to taking loans separately.

b)      Possible Increase in Value:

Investing in repairs and upgrades could work overtime to increase the value of your home. Hence giving you more equity in case you wish to sell.

Disadvantages

a)      Increased Monthly Payment:

A higher mortgage automatically translates to having to pay more in the form of a monthly payment. It might be straining for your budget.The more you borrow, the more interest paid over time increases. At least in the life of the loan, interest will be higher if you borrow more.

b)      Over-Levying Risk:

If the renovation does not bring in the envisioned value, you may owe more for the home than it's worth. Thereby complicating the sale or its refinancing.

Ways to Effectively Gain a Higher MortgageIf you want to apply for a mortgage beyond the purchase price, here are some steps that will enhance your application:

a.       Pay off existing debt

When lenders review your application, they consider your debt-to-income ratio. If you pay off outstanding debts, you will have a better DTI. This can make you a qualifier for a higher loan amount.

b.      Save for a Larger Down Payment

A larger down payment shows lenders that you are financially stable and can serve to mitigate some of the risks. They are taking it by offering to lend them more money.

c.       Consider Adjustable-Rate Mortgages (ARMs):

If you are comfortable with a floating interest rate, an ARM might offer you a lower initial rate that makes your loan even cheaper in the early years.

Final Thoughts: Is a Higher Mortgage Right for You?

Getting a mortgage that is more than the purchase amount can be a good thing to have, but by no means is it beneficial to everyone. Take into view your financial situation, your long-term plans, and your ability to service the loan comfortably. Be sure to focus on funding projects that truly add value to your home, for resale opportunities as well as personal fulfillment.

At Cavan Realty, we believe in helping our clients make informed decisions. If you think taking up a higher mortgage can benefit you, get in touch with us today. You can discuss your options with one of our experienced agents. We can guide you through this process and ensure you get the appropriate loan to turn your new house into your dream home.