Frequently Asked Questions
about Home Improvement Loans
1. What are recreational or luxury improvements?
Items such as swimming pools, hot tubs, Jacuzzis, saunas, playground equipment, furniture, non-permanent (not built-in) appliances. Funds for working capital, debt service or refinancing existing debts are excluded.
2. What is a Loan-to-Value Ratio?
This refers to the percentage of the value of a home which is borrowed. It is calculated by adding up the total of all mortgage loans (including the Neighborhood Revitalization Program loans) and dividing by the value of the home. For example: Your house is valued at $100,000. Your first mortgage balance is $95,000. You want to borrow $15,000 for home improvements. 95,000 + 15,000 = 110,000. 110,000 divided by 100,000 (value) = 110%. If your mortgage balance was $80,000, your loan to value ratio would be 95% (80,000 +15,000 = 95,000, divided by 100,000 = 95%) . If the home had a value of $98,000, your ratio would be 112% (95,000 + 15,000 = 110,000, divided by 98,000 =112%). This is a way of measuring risk: if the home was sold, how likely is it that all of the loans secured by the property could be paid back? NRP loans typically use the tax assessor’s estimated market value (???) as the value of the home.
3. What is a Debt-to-Income Ratio?
This refers to the percentage of a household’s gross (before tax) income which is committed to monthly payments on debt. Debt includes mortgages, home improvement loans, credit cards, car loans and student loans. It is calculated by adding up the total of all debts and dividing by the income.This is a way of evaluating whether a household can afford additional payments, given necessities such as income tax, food, transportation, clothing and other necessities. For example: Sally and Sam Spendthrift earn a respectable $48,000 per year so they have a gross income of $4,000 per month. Their mortgage payment is $1,200, two car payments total $900, all their credit card minimum payments equal $400; so their debt totals $2,500, which is 63% of income. Their neighbors, the Frugals, have the same income and mortgage payment, but only one car payment of $400 and no credit card debt or student loans. The Frugals’ debt to income ratio is only 40% (1,200 + 400 = 1,600, divided by 4,000 = 40%).
4. What is Sweat Equity?
Sweat equity refers to work done by the property owner him/her self, rather than by a hired contractor. Generally, the NRP loans will pay for materials used by the property owner but not for the owner’s labor.
5. What is a Condition Rating?
The Minneapolis Inspections Department does a windshield survey of properties, rating them on a scale of l-10, with l being a “perfect” house and 10 requiring demolition. NRP(Neighborhood Revitalization Project) loans generally are not made to properties which are judged to be in such bad shape (rated 8,9 or 10) that they cannot be feasibly rehabilitated and will need to be torn down or have a very substantial amount of money invested in major rehabilitation.