125% Home Loan for Home Upgrades

Is it possible to borrow more than the value of the home for upgrades? Say you want to borrow 10k more to upgrade the kitchen, are lenders able to do this?

1 Answer

In short, yes!

It is, indeed possible to borrow more than your home is currently worth. It is actually much more possible to do so if you have a bona fide plan to use that money to upgrade your home. This is basically the same principal as a construction loan. A lender is willing to lend money based on the future appraised value of a project as long as the plans, specs, cost breakdown, contractor approval, and appraisal support the loan amount.

Only certain lenders do construction loans, and it's usually those same lenders that do the loan in question which is known as a " rehab loan." If you think about it though, the lender is not REALLY lending more than a home is worth if you consider the future appraised value, the commitment/cost breakdown provided by the contractor, and the fact that the lender will only usually disperse these funds to licensed contractors that have a set schedule of how they are going to use the money to increase the value of the property according to the future appraisal.

For instance, Sally's house is worth $100k and she owes $100k. She wants to add on to her house which will cost $50k, but the addition will increase the home value to $200k. In this case, the new LOAN TO VALUE ratio will be even better than the current ratio. LTV is an important metric for clients to qualify for loans, and it has to conform to a lenders guidelines in order to get a rehab loan.

There are a couple other ways to borrow more than a home's value that do not involve upgrading the house. The first is a 125% line of credit. For borrower's with fantastic credit, income, and assets, some banks will allow them to borrow 125% of their home's value.