Combining Apartments: Financing Your Renovation Costs (Part 3)

C:Documents and SettingsSlavica NikolicDesktopmouchapresentation drawings Layout1 (1)

C:Documents and SettingsSlavica NikolicDesktopmouchapresentation drawings Layout1 (2) (1)(Above) Floorplans for two neighboring condos to be combined on the Upper East Side by Sweeten architect Slavica

This is the third installment of a three-part series on combining apartments. Take a look at Part I for the step-by-step process, Part II to determine a budget.

Now that you have a budget for your apartment combination project, how will you come up with the money? This post on financing a single-home renovation offers several possible options, but combination projects are also a specialty scenario that raises additional questions. If you can’t pay for a combination in cash, let’s take a look at the loan options on the table.

If you’ve ever applied for a mortgage, this will be a similar process with the same requirements, plus a few additional ones. You will be subject to the typical criteria that your lender sets, such as the health of your building’s financials, as well as the new merged monthly carrying costs, and a certain number of units in the building may be required. The amount that you’ll qualify for will be the same as with a single-unit purchase; you’ll likely be eligible for whatever loan products the lender offers on single-unit purchases, including 30-year fixed mortgages, if they offer them. Not all do–for example, Fannie Mae does not currently offer a product for combinations. Few lenders are willing to finance combination projects nowadays, so you’ll have to examine your options with a mortgage broker.

When you do find a lender, they will ask you to meet specific requirements. Among the most common:

* If you already own your apartment and are buying the one next door, you will be looking at a refinancing loan. This is always the case when you already own all or part of the property. If there is an existing mortgage on your original apartment, you’ll pay it off with the refinance because there can only be one first mortgage on the combined units. (Only one first mortgage because you may take out a home equity loan in the future, which is a second mortgage.) If you are buying both units, it will be a purchase loan.

* To apply for the mortgage, both units must both be owner occupied.

* The loan application will require three appraisals: one of each separate unit, and one of the combined apartment. The lender will then base the mortgage on the value of the combined apartment.

* You will be given a certain amount of time in which you must combine the units—say, within 60 to 90 days after closing.

* At closing, the lender will hold a percentage in escrow. Typically, they will hold 1.5 times the full amount, so if your renovation is costing $200,000, they will need $350,000 in escrow. Once your apartments are legally combined (meaning that a passageway has been created and a kitchen removed), they will inspect the work and release the amount back to you.

* There will be a lower loan-to-value ratio (LTV) than on a traditional mortgage. A typical loan-to-value ratio is 65 percent up to $2 million—meaning that you would be allowed to borrow a maximum of $2 million on a home that costs a little over $3,076,000. You will usually be able to borrow less on a combination project, although there is the rare lender who may go up to a 75 percent LTV.

Getting Back What You Put In

While most apartment combinations are initiated because of the needs of your own family, resale potential may still be a consideration. Large apartments with three or more bedrooms are rarer than studios, one- and two-bedrooms, and as families continue raising children in the city, the demand for those apartments has grown. In new developments, sponsors have offered to combine units, while real estate agents marketing combination units will include architectural drawings and other resources needed for such a project. In many neighborhoods, especially those with kid-friendly amenities and good public schools, creating a larger apartment can be a sound financial investment. Each situation is different, however, so be sure to take the following into account:

* Does it make sense for your family’s needs?

* How much are the monthly carrying charges (maintenance and taxes)—will they be affordable for you and for any potential buyers down the line?

* Can you obtain financing for the renovation?

* For resale purposes, what is the estimated market value of the combined unit, versus the two units separately?

Have you done an apartment combination recently through Sweeten? We would love to hear all about your experience! Reach out to us at

Thanks to Alan Trachtman, vice president at FM Home Loans, for sharing his insights!

If you decide to combine apartments, check out our guide General Contractor 101: How to Find One and What to Expect to get a better understanding of working with a contractor on your renovation.

Sweeten handpicks the best general contractors to match each project’s location, budget, scope, and style. Follow the blog for renovation ideas and inspiration and when you’re ready to renovate, start your renovation on Sweeten.