Renovation Loans 101
Whether you’re hoping to revitalize your current home or you’re planning to buy a fixer-upper, several renovation loan options can help bring your vision to life. The first step, of course, is to have a great lender before you begin the process. They can help you navigate the ins and outs of borrowing funds for a remodel, plus help determine which option fits your needs best. With that said, we’ll highlight several renovation loan options to help you understand what to expect before diving in!
What Is a Renovation Loan?
A renovation loan allows you to borrow funds needed to complete home improvement projects, ranging from smaller repairs to ripping walls down to the studs and rebuilding to fit your needs. One unique fact about renovation loans (as compared to traditional mortgage loans) is that they’re based on the post-renovation value rather than the home’s current value.
Let’s face it: big remodeling projects are not cheap, so a renovation loan can help you tackle them with a great return on investment for the improvements.
Types of Renovation Loans
Depending on the type of project you’re hoping to take on, several renovation loan options may work for you, including:
FHA 203k
This renovation loan is backed by the Federal Housing Administration (FHA) and has some compelling benefits for borrowers.
- This loan is designed to help borrowers finance a home that needs significant repairs.
- It offers a Standard option with a minimum renovation of $5,000 (maximum based on project specifications), and a Limited option with maximum renovation of $35,000 (no minimum)
- The credit score requirement for borrowers is typically lower than other reno loan options, providing more opportunities for those who may not have a stellar credit history.
- It allows you to borrow up to 96.5% of the home’s as-completed value.
VA Renovation Loan
This renovation loan is backed by the US Department of Veterans Affairs and available to qualified US veterans.
- A VA-approved contractor must complete the repairs and renovations to use this type of loan.
- This type of loan has more strict requirements than other non-VA-backed renovation loans. However, the VA requires homes to be up to a certain standard when taking out a VA loan, so if you’re hoping to buy a home that needs extensive repairs, this loan can help you make it habitable per VA standards.
- The VA combines your mortgage for the home’s current market value with a renovation loan of up to $50,000 to complete needed repairs.
- For those who already have a VA mortgage and are seeking to make improvements, the VA supplemental loan allows for improvements to the livability and functionality of a home but not for luxuries, such as pools or spas.
Fannie Mae Homestyle
This is another great renovation option that provides renovation loans to eligible borrowers to be used for primary, investment, and second homes.
- The minimum down payment requirement is 5% for primary residences and 10% for second homes.
- It allows you to borrow up to 95% of the post-renovation value of the home, but you’ll be required to pay mortgage insurance if you borrow over 80% of the value.
- This type of loan offers more flexibility with the type of home renovation projects you’d like to complete, so long as they add value to the property. It can include luxury items permanently attached such as swimming pools and patios (cannot exceed 75% of as completed value).
It’s worth noting that if you are a current homeowner looking to utilize a renovation loan, it will require the current homeowners to refinance their existing mortgage. It’s important to ensure the renovations you complete add enough value to make it worthwhile.
Whether you’re still undecided on a home renovation loan or you’re ready to take the plunge, our team of industry experts is here for you. Contact us today to discuss your renovation plans and talk through the options available to you!