A renovation loan lets you finance both the home purchase and repairs in one mortgage. FHA 203(k) loans require 3.5% down with credit scores as low as 580. Fannie Mae HomeStyle needs 3-5% down with 620+ credit. On a $250,000 purchase with $75,000 in renovations, your total loan would be $325,000 with monthly payments around $2,100-2,300 depending on your rate.
How Renovation Home Loans Work
Unlike traditional mortgages, renovation loans include repair costs in the loan amount. The lender releases funds for improvements after purchase, and contractors get paid as work completes.
The basic process:
- Get pre-approved for renovation loan
- Find property needing work
- Get contractor bids and renovation plan
- Lender appraises based on “after-repair” value
- Close on the loan
- Renovations begin, funds released in draws
- Final inspection confirms completion
Types of Rehab Home Loan Options
FHA 203(k) Renovation Loans
Government-backed renovation financing with flexible requirements.
Standard 203(k):
- For major renovations over $35,000
- Structural repairs allowed
- HUD consultant required
- Longer timeline (up to 6 months)
Limited 203(k) (Streamline):
- For repairs under $35,000
- No structural work
- No HUD consultant needed
- Faster, simpler process
FHA 203(k) requirements:
| Requirement | Standard | Minimum |
|---|---|---|
| Down payment | 3.5% | 3.5% |
| Credit score | 580+ | 500 (10% down) |
| DTI ratio | 43% | Up to 50% with factors |
| Property type | 1-4 units, primary residence | Same |
Fannie Mae HomeStyle
Conventional renovation loan with more flexibility.
HomeStyle advantages:
- No HUD consultant required
- Luxury upgrades allowed (pools, landscaping)
- Investment properties eligible
- Higher loan limits in some areas
HomeStyle requirements:
| Requirement | Amount |
|---|---|
| Down payment | 3-5% (primary), 15% (investment) |
| Credit score | 620+ |
| DTI ratio | 45% typically |
| Renovation limit | 75% of after-repair value |
Freddie Mac CHOICERenovation
Similar to HomeStyle with some differences.
CHOICERenovation features:
- 3% down for first-time buyers
- Allows manufactured homes
- Resilience upgrades encouraged
- Flexible on contractor requirements
Renovation Loan Calculator: Estimate Your Payment
How to Calculate Your Renovation Loan
Step 1: Determine total loan amount
- Purchase price + renovation costs + contingency (10-15%)
Step 2: Calculate monthly payment
- Use standard mortgage formula
- Include MIP (FHA) or PMI (conventional)
Example Calculation
Scenario: Buying a $200,000 fixer-upper with $50,000 in planned renovations.
FHA 203(k) estimate:
- Purchase: $200,000
- Renovations: $50,000
- Contingency (15%): $7,500
- Total loan: $257,500
- Down payment (3.5%): $9,012
- Loan amount: $248,488
- Rate: 6.75%
- Monthly P&I: $1,612
- MIP (0.55%): $114
- Total payment: ~$1,726 (plus taxes/insurance)
HomeStyle estimate:
- Same scenario
- Down payment (5%): $12,875
- Loan amount: $244,625
- Rate: 6.5%
- Monthly P&I: $1,546
- PMI (~0.5%): $102
- Total payment: ~$1,648 (plus taxes/insurance)
Renovation Loan Payment Table
| Total Loan | 6.0% Rate | 6.5% Rate | 7.0% Rate |
|---|---|---|---|
| $200,000 | $1,199 | $1,264 | $1,331 |
| $250,000 | $1,499 | $1,580 | $1,663 |
| $300,000 | $1,799 | $1,896 | $1,996 |
| $350,000 | $2,098 | $2,212 | $2,329 |
| $400,000 | $2,398 | $2,528 | $2,661 |
Principal and interest only. Add MIP/PMI, taxes and insurance for total payment.
Rehab Home Loan: What Repairs Are Covered?
FHA 203(k) Eligible Repairs
Standard 203(k) allows:
- Structural alterations and reconstruction
- Modernization and improvements
- Elimination of health and safety hazards
- Changes for accessibility
- Adding rooms or finishing basement
- HVAC, plumbing, electrical upgrades
- Roofing and siding
- Appliances (built-in)
Limited 203(k) allows:
- Minor remodeling (no structural)
- Painting, flooring, appliances
- HVAC repairs
- Plumbing and electrical updates
- Roofing repairs
- Accessibility improvements
Not allowed:
- Luxury items (except HomeStyle)
- Work taking over 6 months
- Projects under $5,000
HomeStyle Eligible Repairs
More flexible than FHA:
- All FHA-eligible repairs plus
- Swimming pools and hot tubs
- Outdoor kitchens
- Landscaping
- Tennis courts
- Guest houses/ADUs
The Rehab Loan Application Process
Step 1: Get Pre-Approved for a Renovation Loan
Find a lender experienced with renovation loans. Not all lenders offer them.
What you’ll need:
- Income verification
- Asset statements
- Credit authorization
- Preliminary renovation plans
Step 2: Find a Property
Look for homes with good bones but cosmetic or functional issues.
Good candidates:
- Outdated kitchens/baths
- Deferred maintenance
- Ugly but structurally sound
- Below-market due to condition
Be cautious with:
- Major structural issues
- Foundation problems
- Extensive mold or water damage
- Properties in very poor areas
Step 3: Get Contractor Bids
You’ll need detailed bids before loan approval.
Bid requirements:
- Licensed, insured contractor
- Itemized costs by room/project
- Timeline for completion
- Materials specified
FHA 203(k) notes:
- Standard requires HUD-approved contractor
- Consultant oversees project
- Multiple bids may be required
Step 4: Appraisal and Approval
Appraiser values property “as-completed” based on renovation plans.
Appraisal considerations:
- Current condition
- Proposed improvements
- Comparable sales of renovated homes
- After-repair value (ARV)
Step 5: Closing
Similar to standard mortgage closing plus:
- Renovation agreement signed
- Escrow account for renovation funds
- Draw schedule established
Step 6: Renovation Phase
Work begins after closing.
Draw process:
- Contractor requests draw
- Inspector verifies completed work
- Lender releases funds
- Repeat until complete
Timeline:
- Limited 203(k): 6 months max
- Standard 203(k): 6 months (extensions possible)
- HomeStyle: Typically 12 months
Step 7: Final Inspection
Lender inspects completed work, releases final funds, and escrow closes.
Renovation Loan Costs and Fees
Upfront Renovation Loan Costs
FHA 203(k):
- Down payment: 3.5%
- Closing costs: 3-5%
- Upfront MIP: 1.75%
- HUD consultant (Standard): $400-1,000
HomeStyle:
- Down payment: 3-5%
- Closing costs: 2-4%
- Inspection fees: $300-600
Ongoing Costs
FHA 203(k):
- Annual MIP: 0.55% (life of loan usually)
- Inspection fees during renovation
HomeStyle:
- PMI until 20% equity
- Inspection fees during renovation
FHA 203k vs HomeStyle: Which to Choose?
| Factor | FHA 203(k) | HomeStyle |
|---|---|---|
| Min down payment | 3.5% | 3% (first-time) |
| Min credit score | 580 | 620 |
| Mortgage insurance | MIP for life | PMI until 20% equity |
| Luxury upgrades | No | Yes |
| Investment property | No | Yes |
| Consultant required | Yes (Standard) | No |
| Max renovation | No limit* | 75% of ARV |
Choose FHA 203(k) if:
- Credit score under 620
- Want lowest down payment
- Primary residence only
- Major structural work needed
Choose HomeStyle if:
- Credit score 620+
- Want to remove PMI eventually
- Need luxury upgrades
- Investment property
Common Rehab Home Loan Mistakes
Underestimating Renovation Costs
Problem: Budget too tight, run out of funds mid-project.
Solution: Include 15-20% contingency, get detailed bids, expect surprises.
Choosing Wrong Contractor
Problem: Delays, cost overruns, poor quality work.
Solution: Check references, verify licensing, review past work, get multiple bids.
Scope Creep
Problem: Adding work mid-project, exceeding budget.
Solution: Finalize plans before closing, resist urge to upgrade during construction.
Timeline Delays
Problem: Project takes longer than loan allows.
Solution: Build buffer into schedule, monitor progress weekly, address issues quickly.
Frequently Asked Questions
Can I do the work myself with a renovation loan?
Generally no. Lenders require licensed contractors for most work. Some programs allow limited DIY for cosmetic work, but structural and systems work must be professional.
How long does a renovation loan take to close?
Longer than standard mortgages. Expect 45-60 days minimum due to contractor bids, HUD consultant involvement and detailed underwriting.
What if renovation costs exceed the estimate?
You’ll need to cover overruns from your own funds, reduce scope or request a loan modification (difficult once closed).
Can I live in the house during renovation?
Sometimes, depending on extent of work. Major renovations often require temporary housing. Factor this into your budget.
What happens if the contractor doesn’t finish?
This is why draw schedules exist—funds are only released for completed work. If contractor abandons project, you’d need to find another contractor to complete with remaining funds.
Next Steps
- Check your credit - Know where you stand before applying
- Get pre-approved - Find a lender experienced with renovation loans
- Research properties - Look for fixers with good potential
- Interview contractors - Get bids and check references
- Understand total costs - Purchase + renovation + contingency + closing costs
For more on financing options, see our guides on construction loans and FHA loan requirements.
Lisa Rodriguez
HUD-Certified Housing Counselor
Our team of mortgage experts provides accurate, up-to-date information to help you make informed decisions about your home financing.
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