How a renovation loan can solve your home headaches
For homeowners who are reluctant to move but need an additional bedroom, a bigger bathroom or better appliances, a renovation loan could help get the job done.
Renovations have the potential to increase the value of a home, so you’ll want to figure out your potential return on investment for any renovation plans you make.
Are you ready to explore how a renovation loan could help you make repairs or upgrades to your home? Apply now!
What is a renovation loan?
A renovation loan is secured by a primary residence, second home or investment property that combines standard financing with the cost of making the improvements.
Improvements generally can be categorized in one of three ways.
- A renovation, which involves repairing and updating what’s in a home.
- A remodel, which changes the functionality and design of a home and could include an addition to the property.
- A repair, which involves fixing rundown or broken items at a home to make it livable.
How do home remodel loans work?
Several types of loans can be used to remodel a home, including government-backed options. It’s good to be aware, though, that certain government loans have restrictions that don’t allow luxury improvements, such as adding a swimming pool to your back yard or a bar to your basement man cave.
You can apply for renovation and remodeling loans during the course of buying a home or through a refinance of your current mortgage.
For a purchase, you could apply and qualify for a loan that includes 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 current mortgages.
All home improvement loans allow the borrower to choose their own contractor to perform the work or to do the work themselves. If you elect to do the work yourself, you must prove to the lender that you have the time, ability and assets to complete the work.
How to apply for a renovation loan
Applying for a renovation or remodeling loan is simple with our Digital Mortgage. Follow these steps.
- Review your finances: Check your credit score, income, debt-to-income (DTI) ratio and cash on hand.
- Gather key documents: You’ll need to provide income verification, tax returns, asset statements and personal identification.
- Apply online: Once you submit your application, your Loan Officer will help you from there.
Types of renovation loans
Many loan options can be used for home renovations and remodeling, and some may be a better choice for you than others.
FHA 203k1
Offered by the Department of Housing and Urban Development (HUD), FHA 203k offers a fixed-rate loan that covers the purchase or refinance and renovation of a property.
Many repairs and improvements are allowed, from minor repairs to room additions. Anything the Federal Housing Administration (FHA) deems a luxury, such as 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 provides $75,000 for mostly minor updates.
For either option, the property can be a single-family home, garden-style condominium, mixed-use property or owner-occupied multifamily building up to four units.
All FHA-financed homes must be the borrower’s primary residence and require a 3.5% minimum down payment option on a 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 or other financing methods. Interest rates for these types of loans are often lower than a credit card or other options.
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 loan
If you’re a Veteran or an active-duty service member, you can take advantage of a renovation loan backed by the Veterans Administration (VA). The benefits of this type of loan are significant, including a 0% down payment option. Eligible borrowers may be able to qualify for a low rate as well.
These types of loans can help you fund repairs, improvements and handicap accessibility on a single-unit or two-unit primary residence. Rate offers VA renovation loans on new home purchases and refinances.
Other renovation options
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) allows you to tap into the value of your home and use it for renovations or remodeling. It’s kind of like a credit card, but usually with a lower interest rate.
Rate’s 100% digital application could allow you to apply for a HELOC in 5-10 minutes and get your funds within five days2, where a traditional HELOC could take a month or more. You could borrow up to $750,0003 depending on the equity in your home, and it comes with a fixed-rate repayment period so your payments won’t change.4
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 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 renovation loan products.
With a cash-out refinance, your lender pays you 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 as you’re starting with a fresh mortgage.
You might be able to secure a lower interest rate on your cash-out refinance than you had with your original mortgage, so you could end up 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 a mortgage refinance.
Pros and cons of renovation loans
Pros
- Makes home renovations affordable without depleting savings
- Purchase or refinance your home to include project expenses
Cons
- You'll start over with a new mortgage term
- Refinancing could cost more depending on available mortgage interest rate
Are you ready to start repairs or upgrades to your home? Apply now!
1Credit score and down payment requirements higher for 2-4 unit, investment properties and renovation products
2Subject to verification of income and employment. Assumes closing the loan with remote online notary. Several factors including county restrictions and requirements regarding online closings or ability to determine condition of property may increase funding timeline.
3Our loan amounts range from a minimum of $25,000 to a maximum of $750,000. Properties located in TX, minimum loan amount is $35,000. Your maximum loan amount may be lower than $750,000 and will ultimately depend on your home value and equity at the time of application. We determine home value and resulting equity through independent data sources and automated valuation models.
4During Rate's Digital HELOC process, the borrower and/or Rate may need to communicate or facilitate the origination and closing of the borrower’s HELOC using non-digital methods, including but not limited to telephone or letter. There may be instances, due to borrower preference, applicable law, or other reasons, in which HELOC closing must occur in person. Additionally, Rate makes no representations and cannot guarantee that borrower’s HELOC will be serviced by a servicer that maintains an entirely digital process.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
Rate is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate, its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
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