How a renovation loan can solve your home headaches
Not having enough homes for sale has been a problem for years, even before the COVID-19 pandemic. But it was during the first couple years of that health emergency, when many people were forced to stay at home and mortgage rates were historically low, that housing inventory became a crisis. Now there is a historically low number of homes for sale nationwide.
All that time during the pandemic spent at home has made us rethink what we want our homes to be and update our ever-evolving wish lists—be it a backyard, an additional bathroom, better appliances, or just more square feet.
And the problems many potential homeowners are having finding a house for sale that checks all of their boxes has forced them to get creative. There simply aren’t enough homes on the market to meet the current demand. In May of 2023, there were 1.04 million units available for sale. Lawrence Yun, chief economist of the National Association of Realtors® notes that "housing inventory is about a quarter of what it was in 2008." There simply are not enough homes out there for most buyers to find what they’re looking for in the area they want to live.
If you can’t find it, create it
This is where a renovation loan can make all the difference, putting the spotlight on those “fixer-uppers” that often go overlooked by prospective buyers. Renovation loans allow borrowers to factor the cost of renovations into their mortgage—alleviating the worry of how they’ll afford extensive repairs.
Guaranteed Rate has a dedicated renovation loans team that can help you finance a smooth renovation.
A renovation loan can quickly expand your search options at a critical time when those highly-sought-after homes are flying off the market. Suddenly homes that you wouldn’t have previously considered become viable options.
When moving isn’t the only answer
For current homeowners, a renovation loan gives way to the option of staying put, while still getting what you need out of your home. If you’re reluctant to leave your home and a neighborhood you love, but need an additional bedroom, a bigger bathroom, better appliances—you name it— you can opt to refinance and make those improvements to your current home.
Many renovations even 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. This can be particularly helpful with some of the little details.
So, yes, maybe you are for sure going to remodel your bathroom, but should you go with a midrange or upscale renovation? Are those fancy marble countertops worth it? This article digs into those questions and runs the ROI (return on investment) numbers for you. It’s a great place to start to get some of those questions answered.
If you’re looking for a home, and not finding what you want in the area you’re looking, a renovation loan allows you to make changes to a home before moving in. And you can roll the costs of the renovation project directly into your mortgage, so you’ll only have one monthly payment to make.
Whether your renovation plans consist of shopping for a fixer-upper or renovating what you already own, you’ll want to be sure to work with a renovation loan specialist from Guaranteed Rate. With their extensive knowledge on all the things that have the potential to pop up throughout a renovation, they’ll be able to help ensure your process runs as smoothly as possible.
Our dedicated renovation specialists ensure a transparent and simple process, while on larger projects a consultant may oversee the work to protect you as a homeowner.
Our specialists will be able to walk you through the process, but it will generally include the following steps:
- Getting pre-approved so you know the exact budget you’re working with
- Finding a property (if you’re moving)
- Making your offer
- Meeting with a HUD Consultant/Contractor at either your home or the fixer-upper you’ve found to conduct a project review and decide on repairs/potential projects
- Obtaining contractor bids for intended improvements—can consult with architects, designers, or engineers
- Ordering your appraisal
- Underwriting—reviewing your appraisal and final renovation budget with your Renovation Specialist to prepare for closing
- Closing—receive, review, sign and return your Closing Disclosure and other closing documents
- Renovating! You can pull out/draw money from your renovation loan up to five times to pay your contractors
- Walking through your final inspection to ensure all repairs have been completed and the building is up to code
How to speed up the reno loan process
As anyone who has gone through a renovation will tell you, it takes time. A patience-trying amount of time. But what they are usually talking about is the construction aspect of the renovation, which not only has potential to drag on, but can be disruptive. So no matter how long the work takes, it’s almost always longer than you want it to.
That doesn’t mean that the financing phase of the renovation has to drag on. Here’s how you can bring positive momentum to getting a renovation loan.
- Work with an expert, local lender
- They’ll have the connections and local knowledge to help you avoid obstacles.
- Have all of your documents ready to go in advance
- You can find a list of most of the necessary information you’ll have to provide here.
There’s a loan for that—your reno loan options
Different types of renovations may call for different types of loans, so your loan officer may point you in the direction of a more specific loan. There are also a variety of renovation loans to meet each buyer’s specific needs. Some options include:
- Fannie Mae HomeStyle and Freddie Mac CHOICERenovation Loans: Offers a wide range of renovation projects—from needed repairs to luxury upgrades—and can be used when purchasing a new home. It also allows you to borrow against the future value of your home.
- FHA 203k*: The Federal Housing Administration (FHA) loan includes standard and limited options as well as a refinance option, and also can be used when purchasing.
- HELOC†: A Home Equity Line of Credit (HELOC) allows current homeowners to pull a line of credit from their home equity for a set timeframe. Homeowners are able to draw funds as needed with competitive interest rates.
- Cash-out refinance‡: Allows a homeowner to refinance their current mortgage for more than the amount owed—taking the difference in cash—which can be used for a variety of things, one of which being renovations.
- Personal Loan**: Personal loans typically offer lower interest rates than credit cards. While the rate you’ll get for a personal loan will vary depending on your credit score, it will give you some flexibility in choosing your repayment terms.
You should note that all renovation loans require using a contractor and all (except VA Reno) allow for “self help” (203k) or “Do It Yourself” (HomeStyle). You may be able to do some of the work themselves if you’re qualified. Working with a loan officer will ensure you can select the best option that correlates with your renovation plans—whether they include finding a new home or updating your current home.
“Real Approval” means an automated underwriting system approval based upon credit information supplied by applicant and subject to Guaranteed Rate’s review of loan documents. 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. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.
Guaranteed 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.
* Credit score and down payment requirements higher for 2-4 unit, investment properties and renovation products.
† Guaranteed Rate, Inc. home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Utah, Kentucky, South Carolina, Hawaii, Texas, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Guaranteed Rate for more information and to discuss your individual circumstances. Restrictions Apply.
‡Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Guaranteed Rate for more information.
**For more information around obtaining a personal loan from Guaranteed Rate, please visit rate.com/personal-loans
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. Guaranteed Rate, Inc. 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 Guaranteed Rate, Inc. Guaranteed Rate, Inc. 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.