Renovation loan can be the right fix

A longtime renter with a stellar credit rating and a stable job, Nicolette Janssen lacked two keys she needed to becoming a homeowner: the courage to try and the right financing.

The courage was bolstered by her boyfriend, Michael Stackhouse, a 27-year-old art student whose tenacious insistence that she could buy a house led Janssen to find, purchase and fix up a 1923 Craftsman bungalow near View Park in Los Angeles.

“He pushes me to the limit,” said Janssen, 35, a dental hygienist who came to L.A. from the Netherlands in the early 1990s.

The financing she used is known as a renovation loan, which allows the buyer to borrow an amount that covers the purchase price and home improvements in a single loan. It is based on the value of the house after improvements. Janssen heard about it from another buyer who received such a loan to purchase a house, fix it up before moving in and cover the mortgage during construction. Until then, Janssen thought she would have to live in a house for a year and build up equity to renovate.

Janssen contacted lender Wells Fargo and set in motion the paperwork to purchase a 1,845-square-foot home for $247,000 and then spend $100,000 for a massive months-long remodel that was completed late last year. The total loan was for $347,000 at an interest rate of 8%.

Although Janssen moved to Los Angeles enthusiastic about the opportunities, she became discouraged after spending nearly $900 a month on rent without building equity for the future. Plus, she didn’t feel safe in her Culver City neighborhood, she said. “I never wanted to unpack.”

But in the fall of 2000, when Stackhouse encouraged her to contact a mortgage broker, she found she could qualify for a home loan of up to $250,000. Her excitement quickly faded, however, as she explored houses in her favorite Westside neighborhoods of Mar Vista, Culver City, Venice and Marina del Rey and realized they cost much more.

In time, she and Stackhouse found a neighborhood near View Park and Baldwin Hills filled with large, old Craftsman homes. A real estate agent took her to see a dilapidated three-bedroom, 1 1/2-bathroom that was shrouded by overgrown shrubs and had been on the market almost a year. Because the house was so cluttered, Janssen couldn’t see the extent of the work needed to fix it up.

She offered to buy the house, listed at $259,000, for $240,000, with plans to use a $10,000 loan from her dad to renovate.

“I thought I’d just paint,” she said. “What did I know?” It was then she learned of the renovation loan program, and her plans suddenly took off.

After she qualified for the loan, Janssen worked with a contractor to write up a renovation plan. A consultant hired by Wells Fargo made sure the planned project was consistent with zoning, that it would be a quality job and that the contractor was licensed and insured. The consultant then issued a report and gave it to an appraiser, who determined the future value of the renovated home.

At first, Janssen wanted to make $47,000 worth of improvements. The bank required another 10% for contingencies, which raised the total renovation part of the loan to a bit more than $50,000. However, partway into the remodel, Janssen and Stackhouse decided that $100,000 was more realistic. Loan agent Jon Sway said increasing the amount of a renovation loan is highly unusual, but he had no trouble in this case because it was based on the future value of the home.

Work stopped for a month while the first loan was closed down and the second put into place. Meanwhile, Stackhouse researched the renovation of Craftsman homes, both from books and the Internet. By driving around the neighborhood, he found contractor Anthony D. Anderson, who was working on another renovation.

Janssen liked Anderson’s reassuring manner and came to respect his hard work and genuine concern for her and the house. She also enjoyed the company and support of her father, Fred, who had traveled from Amsterdam for seven weeks to help out. He even brought along a friend, Marcel Van Ingen, who once owned a hardware store.

To eliminate the stress of paying both the rent on her apartment and the mortgage on the house while it was being renovated, Janssen had factored the first two mortgage payments into the construction loan. When that time was up she moved into the half-finished house rather than pay rent plus the mortgage.

The major goals were to preserve the built-in teak dining room cabinets and moldings, strip most of the walls down to the studs and redo the plumbing and electrical systems, refinish the pine and oak floors, totally redo the main bathroom and turn an illegal half-bath into a legitimate bath, gut and redo the kitchen, turn the garage into guest quarters and rebuild the old double-hung windows.

Her dad took on the last job with a passion, disassembling each wooden window, stripping off the old paint, rebuilding it, regluing, repainting and redoing the rope pulls. This is the norm in the Netherlands, Janssen said. “They like to conserve.”

But the renovation was stressful for Janssen as she and Stackhouse debated about what elements should be restored rather than replaced. “I wanted to save more,” Janssen said.

Janssen’s sister back in the Netherlands was so impressed with videotape she saw of the house, she likened it to a villa. Janssen agrees.

At night, she and Stackhouse sit on the big front porch, look out across rooftops to the lights of Los Angeles’ skyscrapers and listen to the crickets chirp.

“I feel totally spoiled and rich,” she said. “I’m so happy with this place.”

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At a glance

Home buying strategy: Buy a fixer-upper home using a renovation loan to cover the mortgage and repair costs

Purchase price: $240,000, plus $7,000 in closing costs

Renovation loan: $100,000

Total loan: $347,000

Interest rate: 8%

Monthly payment: $2,800

Anticipated monthly payment after refinance at 6%: $2,200

Loan agent: John Sway, Wells Fargo, San Diego, (858) 597-4452, john.sway@wellsfargo.com.

Contractor: Anthony D. Anderson, ADA Construction, Los Angeles, (323) 777-6232

Kathy Price-Robinson can be reached at www.kathyprice.com.