Home renovation loans are an excellent solution for covering the cost of minor repairs or large-scale upgrades on your home. But which loan option is right for you depends on your situation.
Many of my clients are interested in buying a low-cost fixer-upper and turning it into a place they could love. For them, options like the Fannie Mae HomeStyle® Renovation loan or the FHA 203k rehab loan could be ideal.
If you already own your home and want to make improvements, tapping your equity with a cash-out refinance, home equity loan, or HELOC could be the way to go.
Let’s talk about what these loans are for and who would benefit from them the most.
Typically, a home renovation loan is a single mortgage that lets you both finance and renovate a home. Renovation loans can be used either when buying a home or refinancing one you already own.
If you’re buying a home, financing the primary mortgage and the renovations together means you can consolidate your renovation costs into one low-rate mortgage rather than taking out separate loans to buy the property and pay for repairs. That consolidation can also reduce the number of fees, including closing costs.
Renovation loans are unique because they let you borrow more than the home’s current value. Typically, the maximum loan amount is your home’s estimated future value after renovations are complete.
Types of renovation loans
Fannie Mae HomeStyle® Renovation Loans: These are conventional loans backed by private lenders and are technically capped at 80% of the finished home’s value. This means that if your home is worth $250,000 now, but improvement will bump it up to $300,000, you can borrow up to 80% of $300,000 before the project has even begun.
Fannie Mae’s HomeStyle renovation loan can be used to buy and renovate a new home. They can fund various home types, from single-family homes, four-unit homes, condos and manufactured homes.
You can even use a HomeStyle® loan to renovate an investment property, as well as your primary residence, though there are a few restrictions on how the funds can be used. For example, you are not allowed to knock down the existing property and build a new one (for that, you’d need a new construction loan).
Using this renovation loan option allows a homebuyer or homeowners to fund “luxury” changes to their home. These improvements could include:
- An inground pool
- A remolded kitchen or bathroom
- Room additions
- A backyard deck
FHA 203(k) limited: These are renovation loans backed by the Federal Housing Administration (FHA), which caps their funding at $35,000. This loan will help fund repairs, fixes and cosmetic changes. This can mean, for example, new carpeting, a fresh coat of paint or the purchase and installation of appliances. Think of these as repairs that can be done while the house is still habitable.
FHA 203(k) standard: This FHA renovation loan funds major renovations or structural changes that cost at least $5,000. However, the cap can vary depending on the FHA loan limits in the specific county. With this loan option, borrowers can replace, construct or demolish different parts of their homes. It involves additional paperwork and working with a HUD “consultant,” but as your lender, we can handle these aspects.
In either case, keep in mind that FHA 203(k) loans cannot be used for amenities like swimming pools. Instead, think of these renovations as upgrades that improve the functionality of a home. Work such as a new roof, appliances or flooring.
Keep these in mind when thinking about FHA 203(k)
- Is only applicable to primary residences
- Focuses on repairs and fixes as opposed to “luxury” improvements
- Establishes an escrow account that holds the money for your contractor
Renovation loan alternatives
If you already own your home, a “true” renovation loan is not your only option. In fact, it may be easier and cheaper to borrow from your equity using a cash-out refinance, home equity loan or home equity line of credit (HELOC).
Cash-Out Refinance: A refinance replaces a mortgage with a newer one with terms and rates that are current to the market in which a borrower closes the loan. A cash-out refinance is similar to a standard refinance, except that it lives up to its name and allows a borrower to access their home equity and convert it to cash they can use for anything, including a renovation.
Home Equity Line Of Credit (HELOC): A HELOC works similarly to a credit card, but your home secures the revolving line of credit. With this loan option, you only take out what you need to cover costs, as opposed to the lump sum of a cash-out refinance. In addition, the interest on a HELOC loan may be tax deductible if the money is spent on the property that the equity is the source of the loan. There are conditions to this that we can speak about if you’re interested.
These loans provide cash that you can use for any purpose, meaning you don’t need to have detailed construction plans and contractor quotes in order to qualify. You only need to qualify for the loan based on your credit, income and available equity. Then, you can use the money for any type of renovation you want.
Choose the Renovation lending that fits your needs
These programs are incredibly robust and allow you to take a home and make the home you’ve always wanted.
As a homeowner or homebuyer, you are in the driver’s seat when choosing how to fund home improvement projects. The only issue may be better understanding which is the right fit for your unique situation.
As a mortgage professional in one of the nation’s top renovation lenders — Homebridge has been named a top FHA 203(k) lender by HUD for the last several years — I understand how to deliver service that provides the personal touch your goals require. My mission is to provide renovation options that are simple, easy and stress-free.
To learn more about these renovation options and see which fits your financial position, please call/text/email me anytime at 973-943-7289.
By consolidating your credit card debt into your mortgage, your unsecured debt becomes secured debt. Please consult a professional credit/debt counselor for further information.