Preliminary Financial Planning

The most difficult and stressful decisions you will have to make through this process are likely those that have to do with budgeting and financing. There is no getting around that fact that renovation is risky and can cost a lot of money. Your early financial decisions (how you will fund the project) have a large impact on later work and your ability to successfully complete the job.

Budget

Budgeting for a renovation project is closer to art than science. Anyone who has ever gone through this process knows that keeping within a budget involves making difficult decisions. The ways to spend your money are endless, but your bank account is most likely not. Your Realtor®, your lender, your design professional, your contractor, and helpful friends who have been through the process can assist you in setting realistic financial goals and fitting your ideas and goals into your budget.

If your decide to get a standard construction loan, it is likely that your lender will require a detailed budget as part of the approval process. In this case you may need to get preliminary drawings and preliminary bids from contractors prior to closing. Other loan products require you to hire a "consultant" who prepares a budget and approves construction draws as the work progresses. Even if you are financing out of pocket, a preliminary budget is indispensable.

Contingency

Your ballpark target budget should include 10-15% or more as a "contengency" fund. You will need to tap into this money when your contractor determines that you need to replace an additional six floor joists under the bathroom. Or when you find out that the windows you thought you could repaint aren’t salvageable (see rule number two).

Funding and Financing

You have many options for funding your renovation project, but make sure that you have enough money in place before you begin the project. You don’t want to be caught in situation where you have invested money in your property and cannot complete the renovation. If this happens, you are not likely to recoup your investment. Several banks offer “purchase-renovate” products and will loan you money based on the after-improved value of the property. Depending on the location and type of project, the state and federal governments both have tax-credit programs that can help defray renovation costs of properties in designated historic districts.

In certain neighborhoods in Des Moines, Neighborhood Finance Corporation has forgivable loan programs to help defray down payment and some renovation costs for owner-occupants.

Be careful that you do not agree to borrow more money than you can comfortably make payments on. Be wary of adjustable rate mortgages (ARMs), interest-only loans, and other programs that you either don't understand all the rules. This is a particularly key point for first-time homebuyers. On top of your mortgage payments, home ownership carries with it a host of additional financial requirements including (but not limited to) ongoing maintenance, insurance, taxes, sewer, water, electric, security, and gas.