Renovation Loans: Buy or Refinance and Fund Your Repairs in One Mortgage
Most mortgages are based on what a home is worth today. A renovation loan is based on what it will be worth after the work is done. That lets you buy a house that needs work, or improve the one you already own, without a second loan, a credit card, or a pile of cash.
What is a renovation loan?
A renovation loan is a single mortgage that covers two things: the purchase price (or your current loan balance) and the cost of repairs or upgrades. The renovation money is held in an account at closing and released to your contractor as the work is completed.
You get one loan, one closing, and one monthly payment.
Common renovation loan programs
The programs we can offer depend on the lender, the property, and your situation. These are the main ones:
- Fannie Mae HomeStyle® Renovation. A conventional loan for a wide range of improvements, including some that FHA won’t cover. Works for purchases and refinances.
- Freddie Mac CHOICERenovation®. A similar conventional option with its own guidelines.
- FHA 203(k). A government-backed loan with a lower down payment and more flexible credit guidelines. It comes in a Limited version for smaller, non-structural work and a Standard version for larger projects and structural repairs.
- VA and USDA renovation options. Available in limited situations for eligible veterans and rural properties.
What can a renovation loan pay for?
Eligible work depends on the program, but it often includes:
- Kitchen and bathroom remodels
- Roof, windows, and doors
- Electrical, plumbing, heating, and air conditioning
- Flooring, paint, siding, and weatherization
- Basement finishing and room additions (some programs)
- Fixing health and safety problems
- Accessibility modifications
Luxury items, and sometimes things like a new pool, may not be allowed, depending on the program.
How renovation loans differ from other ways to pay for repairs
| Renovation loan | Home equity loan or HELOC | Personal loan or credit card | |
|---|---|---|---|
| Works for buying a fixer-upper | Yes | No, you must already own the home | No |
| Based on | The home’s value after the work | Your current equity | Your credit and income |
| Secured by the home | Yes | Yes | Usually not |
| Typical rate | Mortgage rates | Often higher than a first mortgage | Often the highest |
| Funds released | In stages as work is completed | All at once, or as a line of credit | All at once |
If you already own the home and have plenty of equity and a low rate on your first mortgage, a home equity loan may make more sense than refinancing everything. We’ll tell you if that’s the better route.
How a renovation loan works
- Plan your project. Decide on the scope and get written bids from licensed contractors.
- Pick your program. We compare options based on the work, the property, your credit, and your down payment.
- Apply and submit the project details. The lender needs the contractor bids and a scope of work along with your normal financial documents.
- Appraisal. The appraiser estimates the home’s value after the improvements, and that figure helps set how much you can borrow.
- Close. The renovation funds are placed in a holding account.
- Work gets done and funds are released. Payments go out in stages as work is completed and inspected.
Things to know before you apply
- Contractor requirements. Lenders generally require a licensed and insured contractor, and some programs require a specific type of consultant or inspection.
- Time limits. Programs set a deadline to finish the work, so build in time for delays.
- More paperwork. A renovation loan involves more documentation and more steps than a standard mortgage.
- Owner-occupied homes. These loans are mainly for primary residences. Some programs allow second homes or investment properties, but the rules are stricter.
- Surprises happen. Many programs let you build a contingency into the loan. Ask about it.
Get started
Tell us about the home and the work you want to do, and we’ll walk you through the programs that fit.