How a renovation loan can solve your home headaches
For homeowners reluctant to leave home but who need an additional bedroom, a bigger bathroom or better appliances, a renovation loan could help get the job done.
Many 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’re making.
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 can be generally 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 and broken aspects of a home to make it livable.
How do home remodel loans work?
There are several types of loans that 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 the 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 any 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 . 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
There are many loan options you can use for home renovations and remodeling, and some may be a better choice for you than others.
FHA 203k
Offered by the Department of Housing and Urban Development (HUD), offers a fixed-rate loan that covers both the purchase or refinance and renovation of a property.
Many repairs and improvements are allowed, from minor repairs to room additions. Anything the deems a luxury, such as a swimming pool or an outdoor kitchen, would not be eligible.
The standard or “full” version offers more money and covers even significant structural repairs. The “limited” 203k loan provides no more than $35,000 and is designed for smaller jobs.
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 new 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% 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 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 could allow you to apply for a HELOC in 5-10 minutes and get your funds within five days*, where a traditional HELOC could take a month or more. You could borrow up to $400,000** depending on the equity in your home, and it comes with a fixed-rate repayment period so your payments won’t change.***
Cash-out refinance
A 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 refinancing, 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 of your loan since you’re basically starting with a fresh mortgage.
You might be able to secure a lower interest rate on your cash-out refi than you had with your original mortgage, so you could be looking at 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 any .
Pros and cons of renovation loans
Pros
Home renovation and remodeling projects can be expensive and time-consuming. Renovation loans could help you afford to increase the comfort and safety of your home without wiping out your savings. You can finance your purchase or refinance your home to include the expense of projects that are necessary or that you might have put off because of the expense.
Cons
With a home renovation loan for purchase, your mortgage will include the cost of remodeling as well as the price of the home. You will pay off the renovation expense long-term, and financing could cost more over time depending on the mortgage interest rate you qualify for.
Using a renovation loan for refinancing is a good way to afford costly remodeling, but it will replace your current mortgage, so you will essentially start over with a new mortgage. That could be a daunting concept if you’ve already had a mortgage for a period of time.
Are you ready to start repairs or upgrades to your home? Apply now!
*Subject 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.
**Our loan amounts range from a minimum of $25,000 to a maximum of $400,000. For properties located in AK, the minimum loan amount is $25,001. Your maximum loan amount may be lower than $400,000 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.
***During Rate, Inc.'s Digital HELOC process, the borrower and/or Rate, Inc 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, Inc makes no representations and cannot guarantee that borrower’s HELOC will be serviced by a servicer that maintains an entirely digital process.
