Home Renovation Loan Options
For homeowners who have equity in their home, using the value of their homes to finance home renovations can be an effective way to make their living spaces much nicer.
When it comes to home financing options for renovations, there are three primary options homeowners should consider: government-backed loans, conventional cash-out refinancing, or a home equity line of credit.
Home Equity Loans Or Helocs
A home equity loan allows you to borrow against the equity in your home through a line of credit. Much like a credit card, you can borrow up to a certain amount of money and any balance carries over month to month. Unlike a refinance, youll need to make monthly minimum payments on this loan in addition to your mortgage. Youll only be charged interest on money you use.
One drawback of this option is that your interest rate on the credit line can fluctuate, which will make your monthly payment go up or down. You may also incur a small fee to have your HELOC set up. Before you decide to go this route, make sure youre responsible with credit and that you understand the risks you take. Such risks include damage to your credit if you fail to repay the HELOC or a frozen credit line if your home value drops too much.
Renovate Explore Renovate Options
If you own or have found a home that needs a little of TLC, PrimeLending has the financing you need to make your perfect home dream come true. Our renovation remodeling loans allow you to roll the costs of repairs or upgrades into refinancing your current mortgage, or into the mortgage for the home you buy. Benefits include:
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Know How Much Equity You Currently Have
If youre looking to renovate your existing home, take a look at your monthly mortgage statement to understand how much equity you have accrued.
If a borrower has the ability to pull the money out of their home to pay for renovations via a cash-out refinance or a home equity loan or line of credit, the costs of obtaining money for the rehab or renovation would be less, Becker says. The problem with doing that is when you dont have the equity in your home to pull out that cash.
If doing the rehab will add value to your home and you dont have much equity in your home as-is, then a 203 loan or Fannie Mae HomeStyle Renovation loan may be your only option, Becker says.
Is An Fha 203 Loan Right For Me
In addition to a low down payment of 3.5%, the eligibility terms of an FHA 203 loan are more flexible. Other general eligibility and loan features include:
- Have at least a 620 FICO.
- Do not need to be a first-time homebuyer in order to be eligible.
- If your renovation is extensive and you cannot live in the home during construction, you may be able to finance up to six months of mortgage payments during renovations if the home is deemed uninhabitable by the HUD Consultant.
- Maximum loan amount under a 203 purchase loan, is 96.5% of the after-improved value¹. For refinancing, the maximum loan amount is 97.75 percent of the after-improved value.² To check the current loan limits by county, visit
Although some restrictions and special rules apply, 203 loans can be used to purchase and refurbish condos³, two-to-four unit properties, and mixed-use properties, in addition to single-family residences and homes in planned unit developments.
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Pro: Pay Interest Charges Only On What You Actually Borrow
And finally, one of the biggest advantages of an open-end mortgage is that youll only pay interest on the funds you actually borrow. For instance, lets say youre approved for a $500,000 mortgage at an interest rate of 4.75%.
You end up purchasing a $350,000 home and spend $75,000 to fix it up. That means youll only pay interest on $425,000, not the full amount you were approved to borrow.
What Is A Renovation Loan
A mortgage that allows the borrower to finance repairs, renovations, remodeling or other home improvements into the loan amount is a renovation loan. Not many lenders tackle these, because of the extra paperwork and behind the scenes work involved. Lenders have to be able to okay trusted contractors so they know the work will get done, and done well. Renovation Loans include additional inspections, plus disbursements or draws .
One of the most-used renovation loans is the FHA 203k. This home improvement loan takes special mortgage pre-approval from a lender able to do the work involved with hte 203k. First, the bank must be FHA-approved. But it must also understand the 203k program.
The FHA 203k allows you as the borrower to buy a house even if it doesnt pass an FHA inspection and close on that house before the work is done. Construction happens after closing, and is paid for with the overall loan based on the after-improved value of the house. For about $6 a month in addition to the purchase price of the home, you can finance $1,000 in renovations. So if youre looking at a $20,000 remodeling budget, youll add about $120 to your monthly house payment.
Renovation loans help home buyers get the house they want, and turn it into the home they love. And its all rolled into one mortgage its not a second mortgage.
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Work Doesn’t Have To Be Major
Renovation loans give you more homebuying options by making it possible to buy fixer-uppers and do repairs immediately. The loans may pay for structural repairs, cosmetic renovations and in-between improvements.
HomeStyle and 203 loans may pay for structural repairs, cosmetic renovations and in-between improvements.
Structural repairs include work to make the home habitable. For example, replacing copper plumbing and electrical wires that were torn out while a house sat vacant. Adding a room counts as a structural renovation.
Cosmetic renovations include things like replacing outdated kitchen cabinets. An example of an in-between improvement is a roof replacement.
Most renovation mortgages come in two types:
FHA 203 loans are mortgages insured by the Federal Housing Administration.
HomeStyle loans are mortgages guaranteed by Fannie Mae.
These two renovation loans share many similarities. Among them:
Borrow Extra Money To Renovate
If youre buying a property or refinancing an existing home loan, you may have the option to borrow a little more than youd normally need and use this extra cash to pay for renovations.
Keep in mind that getting a bigger loan may require you to hold a bigger deposit or more equity, especially if you want to avoid paying for Lenders Mortgage Insurance . Also, a bigger loan means making bigger repayments, costing you more from month to month.
Finally, by paying interest on the cost of your renovation over a term of 20 to 30 years, your project could ultimately end up costing a lot more in the long term than it would by paying for it upfront.
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How Do I Get A Renovation Mortgage
A renovation loan has a few more steps than a conventional mortgage loan.
Steps for getting a renovation loan:
- The approval process can take longer for renovation mortgages than for conventional loans.
- It may be hard to find a mortgage lender that offers renovation mortgages
- Finding a good contractor who will work with the lender can also be difficult
- Renovation plans are set beforehand, so theres not a lot of room for flexibility
Remortgage To Fund Home Improvements
This is what we covered above – you replace your existing mortgage with a larger one. After paying off the initial mortgage, you use the extra cash to fund your home improvements.
Well cover it in full later on, but if you want even more detail, you can take a look at our full article: remortgaging for home improvements.
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Apply For A Refinance
If you are interested in refinancing, speak with your lender about the options available to you and which may best suit your needs.
Your lender will be able to help you understand the requirements of each mortgage option and guide you through the application process.
For more information about homebuying and homeownership, visit My Home by Freddie Mac®.
How Do You Apply For A Home Improvement Loan
There are a few things youll need to do in order to apply for a home improvement loan. In most cases, the process is very similar to applying for other types of personal loans. Some smaller lenders may require an in-person application, but most lenders allow you to apply online.
You should make sure that you have your finances in order before you apply. Most lenders require a credit score of at least 600, although some lenders will issue loans to borrowers with scores as low as 680. In general, the higher your credit score, the more loans youll qualify for and the better rates youll be offered. If your credit isnt yet where you want it to be, you should take steps to raise your score before applying for a loan, including making on time payments, reducing your credit utilization, and keeping old accounts open.
You should also gather documentation that is typically required for a home improvement loan application, including your W2s or pay stubs, proof of address, mortgage, and any other relevant financial information.
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How To Use Your Mortgage For Renovations
With renovation mortgages, part of the funds go towards the purchase price or current mortgage balance, and the remainder of the funds are usually deposited to your bank account or possibly advanced to a construction/renovation company, depending on your instructions and lender policy.
One key thing to remember with mortgage renovation loans is that interest starts accruing from the day the renovation funds get deposited to your bank account, whether you use them to cover your renovation costs or not.
This means that it is important to have your labor, supplies, and equipment lined up to start work immediately.
Its important to consider all your available options when it comes to home renovation financing for your new or existing fixer-upper home. Remember, your financial situation is unique to you. To make the right decision when it comes to your home renovation loan, talk to a mortgage specialist today.
Use A Personal Loan Secured By Your Equity
Another potential use for your home equity is to secure a personal loan, separate from your home loan. Secured personal loans often have lower interest rates than unsecured personal loans, and because they typically have shorter loan terms than home loans , you may pay less total interest on the cost of your renovations.
However, there are risks involved. Chiefly, if you default on personal your loan, this could mean losing your security in this case, your house. Additionally, personal loans often have higher interest rates than most home loans.
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Can A Mortgage Include Renovation Costs
Buying a home is a big deal. Buying a fixer-upper that needs renovations is an even bigger deal. The question is, can a mortgage include renovation costs so it doesnt have to come out of your pocket right now?
The short answer is yes there are actually a few options you have available.
The Best Home Improvement Loans: Recap
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Cashout Refinance For Home Improvements
Cashout refinancing involves replacing your current mortgage with a new loan of a higher amount. You then receive a lump sum payment for the difference at closing.
You can use the money for any purpose including home improvements. And since the cash is yours to manage, the lender wont have to review your renovation plans or approve them.
Your homes current value determines the amount of money you can receive with a cashout refinance.
For a primary residence, a cashout refinance typically has a maximum loantovalue ratio of 80 percent. That means you need to leave at least 20 percent of your home equity untouched, which will limit the amount of cash you can withdraw.
With a cashout refinance, you receive a lump sum payment at closing. You can use the funds any way you want.
This type of refinancing is available with different mortgages including conventional, FHA, and VA loans. Unfortunately, USDA loans do not allow cashout.
A cashout refinance is a costeffective way of paying for home improvement projects since youre able to borrow at a lower rate compared to using personal loans or a credit card.
But this type of refinance isnt without drawbacks.
For starters, cashing out your equity increases your mortgage balance. And since refinancing involves getting a new mortgage, you have to meet credit and income requirements before youre approved.
Funding Your Renovation With A Renovation Loan Program
Freddie Mac offers several mortgage products that combine a no cash-out refinance and renovation financing. The mortgage closes in a single transaction, which can save you time and money, and lets you make a single monthly payment.
Each of these products can also be paired with a home purchase, if you find a home youd like to buy that needs some work.
CHOICERenovation®
The CHOICERenovation mortgage allows you to finance a wide range of repairs and renovations, including those to recover from damage done during a natural disaster or to increase your homes resilience to future events, to update an older home, or to accommodate your changing needs.
CHOICEReno eXPressSM
Freddie Mac’s CHOICEReno eXPress is a streamlined renovation mortgage designed to provide flexible financing for smaller-scale home improvements.
CHOICEReno eXPress provides an option for those looking to finance smaller-scale home improvements.
GreenCHOICE Mortgages®
A GreenCHOICE® mortgage allows you to finance energy- and water-efficient updates to your house that can help you save on utility costs and make your home more comfortable. It can be applied to cover basic improvements, including:
- High-efficiency appliances and fixtures, such as air conditioners, heaters, refrigerators, freezers and lights.
- Solar water heaters.
- Low-flow water fixtures.
It also can be used to finance bigger improvements, such as solar panels.
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Look At What Youre Working With
When youre starting to look for a home, it can be hard to see past the worn linoleum flooring or the wood paneling on the walls. But these are easy fixes.
Real estate broker Ali Berry says, I tell my clients to keep an open mind and look at the layout of the house. The paint, carpet, floors, cabinets, etc., can be changed relatively easily. The main things you want to look for are a great layout, good bones, no foundation issues and good mechanicals . Cosmetic things can be changed, but the flow of a house cannot well, not without spending a fortune, that is.
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How Does An Open
An open-end mortgage often works best when home buyers or investors choose a fixer-upper property that requires serious renovations. For instance, lets say youre approved to take out a $400,000 mortgage.
The home you end up purchasing costs $300,000, but it needs some work done. With an open-end mortgage, youll still be approved to take out the entire $400,000, but youll only pay interest on the money you actually end up using.
After you buy the house, you end up putting $50,000 worth of work into it. Since you only spent $350,000, thats the amount youll pay interest on.
You can use our mortgage calculator to see how your mortgage payment will be affected by tapping into the unused loan proceeds. However, open-end mortgages are not allowed in every state.
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What Happens If The Renovations Are Not Completed On Time
USDA renovation loans stipulate that the work on the home must be complete within six months.
However, lenders recognize that things happen. Sometimes contractors are unable to finish the job, or you need to fire them for other reasons. In some cases, the work takes longer than expected due to unforeseen issues with the home or supply chain issues with materials.
If it looks like your renovations will take longer than expected, talk to your lender immediately. Let them know the situation and what your next steps are for getting the work done.
The worst case scenario is that you dont communicate at all with your lender and the renovations are not completed, Levitt says. In such an instance, your lender may apply your remaining renovation money to your loan principal and eliminate your renovation fund.
Then the balance on your mortgage will be lower, but you wont have the funds available for continuing the repairs.
Can I Afford The Extra Monthly Repayments
This is the most important question that homeowners need to ask themselves. If you fail to make full monthly payments on your mortgage, your home is at risk, so its essential that you only borrow what you are confident youll be able to repay. Its also crucial to consider upcoming life events – such as having a child, changing jobs or retiring – that could affect the affordability of your mortgage.
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