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Renovation

Home Renovation loans

When you see the terms “good bones” or “fixer upper” in a real estate listing, you know that the home is a good candidate to be renovated. And when you’ve been living in your home for a few years, you’ve probably built up a long list of improvements that you’d like to see happen. In both situations, you’ll need to figure out how to afford to make those upgrades. That’s where a home renovation loan comes in.

For the last few years, the number of homes available for purchase has been low, and that’s only gotten worse since 2020. A home renovation loan can help you expand your options and create the home you’re having a hard time finding.

Couple celebrating home renovation loan

Table of contents

What is a home renovation loan?

A renovation loan is a first mortgage loan secured by a primary residence, second home, or investment property which combines standard financing plus the cost to make the improvements. It is based on the “after improved” value of the home. These improvements can be generally categorized in one of three ways:

  • A renovation , which involves repairing and updating what is already existing in a home
  • A remodel , which changes the functionality and design of a home, and could include adding an addition to the property
  • A repair , which involves fixing old, rundown and broken aspects of a home to make it livable

There are multiple ways to finance a renovation, including a cash-out refinance or a home equity line of credit. Home improvement loans are unique because they are one of the only financing options that are based on the after improved value and condition of the home—that is, the likely value of the home after the project is complete.

Renovating a property that’s seen better days can be a perfect way to find the home you’ve been dreaming of when there aren’t many options on the market. And it can help you get into your preferred neighborhood at a lower price point.

What kind of projects are eligible for home improvement loans?

Renovation loans can cover a wide range of projects in and around your home. From simple repairs and updates to complete remodels, building up a new story and adding an addition, here are some examples of the improvements that are eligible..

Non-structural renovations

Some examples include:

  • Remodeling kitchens and baths
  • Finishing a basement
  • Repairing or replacing a deck
  • Repairing an existing pool
  • Replacement of electrical, HVAC, plumbing, installation of well and/or septic tanks
  • Aesthetic changes and upgrades to the exterior of the home, such as new siding, paint and landscaping
  • Elimination of health and safety hazards, such as lead-based paint and mold
  • Installing accommodations for handicap access
  • Adding, repairing or reroofing a garage

Structural renovations

Some examples include:

  • Raising a roof
  • Adding a garage
  • Adding square footage with an addition
  • Construction of a new accessory dwelling unit (ADU)
  • Completely rebuilding a home on a modified existing foundation
  • Converting single family to 2, 3 or 4 units
  • Converting 2, 3 or 4 units to single family

Luxury renovations

These types of improvements are limited to the Fannie Mae HomeStyle® and CHOICERenovation® loan programs (more on these below).

Some examples include:

  • Custom swimming pool
  • Hot tub or sauna
  • Outdoor kitchen
  • Extensive landscaping projects
  • Entertainment room
  • Music/art studio
  • Custom fitness center

Home improvement loans: Purchase or refinance

Renovation loans can be applied for during the course of buying a home or through a refinance of your current mortgage. For a purchase, you apply and qualify for the loan including the cost of the desired improvements. The loan calculation and down payment are based on the purchase price plus the cost of the renovations.

For a refinance, the loan amount is based on a percentage of the “after improved” value which includes the renovations and the payoff of any current mortgages. All home improvement loans allow require the borrower to choose their own contractor to perform the work, or in some cases, do the work themselves, providing they can prove to the lender that they have the time, talent, and in some cases, assets to complete the work.

Renovation loan options

There are many home improvement loan options, and some may be a better choice for you than others. Here’s a rundown of some of them:

FHA 203k

Offered by the Department of Housing and Urban Development (HUD), FHA 203k offers you a single, long-term, fixed-rate loan that covers both the purchase or refinance and renovation of a property. These government-insured loans can be huge assets to both new and long-time homeowners who want to make necessary home repairs and improvements.

Many, many repairs and improvements are allowable including major and minor repairs all the way to large room additions. Anything the Federal Housing Administration (FHA) deems a luxury, like building a swimming pool, or an outdoor kitchen would not be eligible.

There are two types of FHA 203k renovation loans: The standard or “full” version offers more money and covers even significant structural repairs. The “limited” 203k loan, on the other hand, provides no more than $35,000, and is designed for smaller jobs. For either option, the property can be a single-family home, garden-style condominiums, mixed use properties and owner-occupied multi-family units, up to 4 units. All FHA financed homes must be the borrower’s primary residence and require a 3.5% minimum down payment on a new purchase.

HomeStyle® or Choice® Renovation Mortgage

Offered by Fannie Mae and Freddie Mac, these Conventional Renovation Mortgages help borrowers make repairs and renovations with one mortgage, rather than a second mortgage, home equity line of credit, or other costly financing methods. Plus, interest rates for these types of loans are often lower than a home equity line of credit, personal loan or credit card.

These can be used for any renovation project including “luxury” improvements, and they come with down payment options as low as 3%. These loans are eligible for projects involving single-family homes, condos or townhomes. Single-family second homes and investment properties are also permitted.

VA Renovation

If you’re a veteran or an active service member, you can take advantage of a VA renovation loan. The benefits of this type of loan are significant, including no down payment requirement or mortgage insurance. Eligible borrowers may be able to qualify for a very low rate as well.

These types of loans can help you fund up to $50,000 in repairs and improvements and handicap accessibility on a single-unit or 2-unit primary residence. Rate offers these VA renovation loans on new home purchases and refinances.

Cash-out refinance

A cash-out refinance allows you to tap into the equity that you’ve built up in your home. When you use this type of home loan, you’re essentially trading your original mortgage in for one with a higher total loan amount. It’s important to note that cash-out refinances use the “as-is” appraisal value of your home unlike the “after-improve” appraisal value does on our renovation loan products.

With a cash-out refinancing, your lender pays out the difference between the original mortgage and your new one in cash, which you can spend on any renovations you like. The downside to this approach is that you’ll extend the amortization schedule of your loan since you’re basically starting with a fresh mortgage.

You might be able to secure a lower interest rate on your cash-out refi than you had with your original mortgage. So, you could be looking at lower interest payments in addition to the liquid assets needed to take on a home improvement project. But you will also need to pay the closing costs that would come with any mortgage refinance.

Renovation loan qualifications

Qualifications for home improvement loans vary depending on the type of loan you’re applying for. Our Renovation Specialists can help you find the loan you need for your financial situation and that will meet the needs of your project.

Some of the qualifications include:

  • Minimum FICO score requirements apply—generally 620 and above
  • All rehab work must be completed by a licensed and insured contractor
  • Property can be a primary residence, single-family dwelling, townhome, 1-4 unit multi-family dwelling, second home or investment property

Home Renovation Loan Process

Whatever your renovation plans, it’s smart to work with a renovation loan specialist. With their extensive knowledge on all the things that have the potential to pop up throughout a renovation, they’ll be able to help ensure your process runs as smoothly as possible.

Rate’s dedicated renovation specialists make sure the whole process runs smoothly. For more complex projects, a consultant oversees the project to protect you as a homeowner. Our specialists can walk you through the process, which generally includes the following steps:

  • Getting pre-approved so you know the exact budget you’re working with
  • Finding a property (if you’re moving)
  • Making your offer
  • Meeting with a HUD Consultant/Contractor at either your home or the fixer-upper you’ve found to conduct a project review and decide on repairs/potential projects
  • Obtaining contractor bids for intended improvements—can consult with architects, designers or engineers
  • Ordering your appraisal
  • Underwriting—reviewing your appraisal and final renovation budget with your Renovation Specialist to prepare for closing
  • Closing—receive, review, sign and return your Closing Disclosure
  • Renovating! You can pull out/draw money from your home renovation loan up to five times to pay contractors or for supplies, etc.
  • Walking through your final inspection to ensure all repairs have been completed and the building is up to cod

The Draw Process

The draw process consists of a scheduled payment of a percentage of the total loan at predetermined stages, once all the work for that stage has been completed.

Rate’s renovation projects are managed by an in-house team of Draw Experts to ensure the quality of the work and your experience during the renovation process. Projects are assigned to a single point of contact who will help manage all functions including inspections, draws, payments to contractors and any other renovation-related tasks that may come up during the process.

Our software platform provides full visibility into the Renovation project. This allows for automated inspections, electronic payments and also gives the builder the ability to request funds directly from a computer or cell phone.

At the completion of each stage, when your contractor is ready for a draw, they will contact the Draw Specialist to initiate it. And when all the work is complete, there will be a final inspection and title update, and this is when the remaining funds will be released. If for any reason there are funds left over in the escrow account, they will be applied to the principal balance of the loan.

Choosing the right option for you

Before you choose how to finance your renovation project, make sure that you speak to a Rate Renovation Specialist. That way, you’ll get an expert opinion about choosing the best option for you. Our Renovation Specialists are experienced and local, so they know the specifics of your market and can help you leverage the best local resources to make your renovation go more smoothly.

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