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[10 on Tuesday] How to Finance Your Historic House


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We've talked about how to find a historic house and figure out its style (parts One and Two), so this week, we'll cover how you can pay for it all.

Purchasing a house is a complex process, with many steps, costs, and decisions along the way. When you’re buying a historic house in particular, there are a few different elements and terms you’ll want to be aware of ahead of time so you can prepare and plan accordingly.

Side note: You’ll find this toolkit referencing things like deed restrictions, easements, and historic house inspections. We will explain these concepts in more detail in upcoming toolkits so you have the complete picture.

But in the meantime, let’s talk about the money. Check out the slideshow to learn what you need to know about financing your historic house.

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[10 on Tuesday] How to Finance Your Historic House

  1. 1. How to Finance a Historic House10 Steps and Terms to Know Before Buying Photo courtesy tomazstolfa, Flickr
  2. 2. Photo courtesy Editor B, Flickr1. Collect supplemental informationfor your mortgage.Almost everyone who buys a house requires a mortgage to help financethe purchase. The lending institution typically requires certain informationabout your financial status, such as income and credit history, and copiesof the house’s qualified inspection. With designated historic houses,lenders may also require information about deed restrictions, easements,or historic designation regulations.
  3. 3. 2. Anticipate extra fees --just as you would with anew house.Many extra fees and costs pop up when you buya house. These include legal fees for closing onthe property, inspection costs, and filing fees.Many states also have real estate transfer taxesand other state or local taxes associated withhome purchases. Here, historic houses are nodifferent than new houses, in that these coststypically add thousands of dollars to thepurchase price.Photo courtesy, Flickr
  4. 4. 3. Consider how locationmight impact your lendingoptions.Some historic houses, particularly in urbanareas, are located in neighborhoods wherefinancial institutions charge higher interestrates or simply aren’t conducting as muchbusiness. In these cases, the lender mayrequire borrowers to obtain additional loanguarantees or increase their equity in theproperty before approving the mortgage. Photo courtesy w.marsh, Flickr
  5. 5. 4. Be prepared for other potentialfinancial arrangements.1) If you qualify for a Veterans Administration (VA) loan or a Federal Housing Administration (FHA) loan guarantee, the historic house might not fit the standard profiles these programs use.2) If the inspection reveals major repair or replacement problems, the lender might require evidence of your ability to pay for the necessary work.3) If you as the purchaser plan to get the repair money as part of the mortgage, the lender may escrow that portion of the loan to pay the contractors directly.
  6. 6. 5. Investigate if a property is insurablebefore you commit to buying it.In some cases, insuring a historic house costs more than insuring a new house ofa similar size. Why? Because historic houses often require materials or methodsno longer in use, so faithfully rebuilding them in the event of damage ordestruction will almost always cost more than repairing a newer house. Checkout National Trust Insurance Services to learn more about your options. Photo courtesy Ron Cogswell, Flickr
  7. 7. 6. Consider your taxes --and consult professionals.Typically, historic houses will have the sameproperty tax burdens as new ones. You may,however, be eligible for federal historicrehabilitation tax credits or tax deductions ondonated preservation easements. Inaddition, 39 states and the District ofColumbia have legislation with a wide rangeof benefits for historic homeowners, fromreduced property taxes to state income taxcredits for qualified rehabs. Consult yourSHPO and a knowledgeable tax accountantor attorney before signing a contract so youknow exactly what’s available to you. Photo courtesy kenteegardin, Flickr
  8. 8. 7. Get the house appraised(step 1).A professional appraiser uses a four-stepprocess to determine a historic house’s value.First, the appraiser defines why the appraisal isbeing conducted (to determine fair market value,insurable value, investment value, or acombination thereof); what restrictions andeasements are associated with the property;and what the current local real estate marketconditions look like.(See Slide #12 for definitions.)Photo courtesy nikcname, Flickr
  9. 9. Photo courtesy Images_of_Money, Flickr8. Get the house appraised (step 2).Next, the appraiser will collect and examine a variety of information -- fromlocal mortgage lending rates to zoning laws -- to determine the property’s“highest and best” use. (In other words, the use that would produce thehighest value.) For example, if a historic property is zoned for both single-and multi-family dwellings, the “highest and best” economic use wouldtypically be the latter.
  10. 10. 9. Get the house appraised (step 3).The appraiser then estimates the value of the property as if it were vacant land(compared to prices of comparable vacant lots that have sold recently). Thehigher the prices of recently purchased land, the higher the property’s estimatedvalue will be. Sometimes it raises the sales price so high that purchasers of largehistoric estates will subdivide the surrounding property for new development sothey can finance the purchase of the house. Photo courtesy, Flickr
  11. 11. 10. Get the houseappraised (step 4).In the final step, the appraiser will apply one ormore of the “three approaches to value” (seedefinitions on next slide). The principles are thesame for historic and new houses, but a coupledetails diverge.• For example, find an appraiser who’s familiarwith the qualities and materials of historic housesand can assess them accurately.• Also remember that historic houses often lackcomparables, making the market approachharder to calculate.• And with cost approach, older homes often havegreater physical deterioration, functionalobsolescence (no central air conditioning, forexample), or economic obsolescence (like whena one-time country home now sits next to a stripmall). Photo courtesy boodie131, Flickr
  12. 12. Definitions- Fair market value: an estimate of the highest price the house andits land will command in the open market.- Insurable value: an estimate of the cost to replace the house andother improvements on the land should they be damaged ordestroyed.- Investment value: determined by considering the rental incomethat could be derived from the property and its likely selling price atsome future point.- Market approach: compares the house being appraised to similarones sold recently, with adjustment values added for differingfeatures (ex. wraparound porches or odd heating/cooling systems).- Cost approach: calculates the cost of reproducing the house andother improvements on the land (ex. garages, fences, anddriveways), then subtracts the buildings’ depreciation value, thenadds in land value to determine total property value.- Income approach: often used if the house is to be rented ratherthan owner-occupied. Value is derived from estimating the netincome (rent received minus owner expenses) that the property willgenerate over a full year. Rent depends on the property’s size,condition, location, and use.
  13. 13. Ten on Tuesday features ten preservationtips each week. For more tips,